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Contracts Outline Bernstein Spring 2001

I. Bases of recovery CONSIDERATION

Serves the Formality Functions of Contract: See Fullera. Evidentiary: Contract proves there was an agreement in case of controversy, ceremony or notary

both serve this function.b. Cautionary: Contracts deter breach of agreement.c. Channeling: Contracts offer a channel for legally effective expression of intention, a legal

framework for parties to fit their actions into. Definition: 2 Types; Consideration usually must be present under both

Bargain theory Restatement §71. Requirement of Exchange; Types of Exchange: (S 3)

(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is bargained for if it is sought by the promisor in

exchange for his promise and is given by the promisee in exchange for that promise. (3) The performance may consist of

(a) an act other than a promise, or (b) a forbearance, or (c) the creation , modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

Note indicates “bargained for” requires element of inducement See Fischer where $1 was only meritorious consideration; nothing of value exchanged

Formal Theory Requirements: something going between two parties and nexus between parties Something of value received by promisor from promisee

o Promise to pay / Return promiseo Actual performance

See Hamer Could be consideration under Hamer but not under Bargain (see Fischer)

Promise must be supported by consideration to be legally enforceable. Promises in family context are usually not enforced

MILLS V. WYMAN (PG. 170): Wyman (25 yrs. old and independent) was sick after voyage at sea and was taken in by a

stranger. When he died, Wyman’s father wrote letter promising to pay plaintiff for expenses. Father did not pay and plaintiff sued.

Formalist approach A past act followed by a promise to pay is not supported by consideration.

o Mills did not gain from services for his independent sono Wyman did not incur new debts after Mills’ promiseo Exceptions

Under seal, mercantile (both parties in business of making money), or in emergency situations

Moral obligation alone does not constitute consideration. If applying Restatement §71, no inducement was present

HAMER V. SIDWAY (PG. 46): Plaintiff’s uncle promised that if nephew refrained from drinking and gambling, etc… until 21 yrs.

of age, he would pay nephew $5000. Nephew refrained from behavior. Uncle said nephew could have the money and put it in the bank for him. Uncle died, nephew seeks money from estate.

A promise is supported by consideration if the promisee abandons some legal right or limits his legal freedom of action as an inducement for the promise.

High point for legal formalism – this court would say almost anything in exchange for anything is consideration; value of thing exchanged is irrelevant.

o Only relevant whether promisee acted to his detriment Does not matter whether the thing which forms consideration benefits promisor

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Does not matter whether nephew actually sacrificed or had any previous intention to refrain

Generally, courts are unwilling to enforce promises within families, but here the court does it. DOUGHERTY V. SALT (PG. 4) CARDOZO

Aunt promises boy $3000 after she dies. Writes “value received” on note. Money never paid to boy.

Court held it was an executory gift; promise is not enforceable. Promisee did nothing to get money Intent to be bound is not enough

Court wants to distinguish bargained for exchanges from gifts. MIER V. HADDEN (S 3): Plaintiff contracted with defendant for an option to purchase defendant’s

farm within a certain time period. Contract stated that for consideration of $1, defendant agreed to sell land for $8300. Plaintiff procured buyer and informed defendant of intent to purchase. Defendant would not perform contract. Contract was supported by valuable consideration ($1) and was therefore legally enforceable. Defendants get a free real estate agent out of the deal – so there is an equal exchange beyond $1 –

distinguishes Fischer (parties were not transacting business). FISCHER V. UNION TRUST (S 6): Plaintiff’s father gave gift of property for Christmas to incompetent

daughter, plaintiff, over Christmas. Plaintiff gave father $1 (passed by the son, possibly as “a joke”) at the time of the gift. Plaintiff and father continued to live there after gift. Executory gift/contract without any valuable consideration is not legally enforceable. Decision is based on more on §71 – looks to bargain theory of contract – was there an inducement

and was the bargain reasonable? No, inducement was love not $1 Hamer Court would have dictated a different result.

MILLER V. MILLER (PG. 182): Wife and husband entered contract for wife to stop nagging/whining and perform “wifely duties.” In return, husband to provide for necessary expenses of family and give wife $200 per year for personal use. Husband stopped providing “necessary expenses.” Consideration not present, therefore contract not enforceable. Court should not interfere with marriage.

WHITE V. BLUETT (PG. 184): Father promised son to absolve him of repaying loan if son stopped complaining. Son agreed, and after father’s death, suit was brought for son’s debt. Abstaining from something you had no right to do (whine/complain) is not consideration. Reluctance to get involved in family matters, even if consideration were present

BALFOUR V. BALFOUR (PG. 184): Husband and wife made promise. Agreements between husbands and wives are not contracts because the parties do not intend that

they should have legal consequences. PILLANS V. VAN MIEROP (PG. 11): Plaintiff advanced 800 pounds to White. Defendant wrote to

plaintiff and guaranteed White’s debt. Defendant refused to honor guarantee. There was consideration because plaintiff was “deluded and diverted from using any legal

diligence to pursue White. Held that consideration was not necessary if promise is in writing – this part later overruled by H.

of L. Exceptions to requirement of consideration; depends largely on what court thinks is ordinary

behavior PROMISSORY ESTOPPEL

Status of parties is very important Promissory estoppel is not a substitute for consideration; it is a separate and distinct basis of recovery. When arguing promissory estoppel, do not argue justice: look at the quid pro quo and reliance Generally courts are more inclined to find for plaintiffs on these motions when they know the proper

measure of damages; they reward damages as justice so requireso Courts generally award reliance in order to restore the pre-contractual position of partieso As opposed to expectation damages to compensate P as if K were performed

D&G Bacardi, e.g. However, court did award lost profits in form of opportunity cost since reliance

alone would have granted no real compensation (justice required more)

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Today promissory estoppel can even be applied to commercial contracts (Bernstein does not like this)o See D&G Stout v. Bacardi o Goodman opposed to Feinberg (employment K)

Restatement §90: requires reasonable reliance(1) A promise which the promisor should reasonably expect to induce action or forbearance on

the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by the enforcement of the promise. The remedy granted for breach may be limited, as justice requires.

(2) A charitable subscription or a marriage settlement is binding under subsection (1) without proof that the promise induced action or forbearance.:

KIRKSEY V. KIRKSEY (PG. 21): Plaintiff was wife of defendant’s late brother. She lived on public land. Defendant wrote to widow inviting her to live with him and promising a comfortable place to raise children. She lived well for two years then he put her in an uncomfortable home and then kicked her out completely. Defendant’s promise was a mere gratuity. Because no consideration was given, promise is

unenforceable. RICKETTS V. SCHOTHORN (S): P’S dead grandfather gave her a promissory note for $2000. He gave

it to her so she would not have to work anymore. Upon receipt, she immediately quit her job. She did not work for a year, and then later, with his permission, she took another job. No consideration but P awarded money on basis of promissory estoppel Under Hamer Court there would probably be consideration – she did change herself to get the

money in reliance upon the promise Reconciling with Kirksey: difficult

Here, damages would be quantifiable; Kirksey: more difficult ALLEGHENY COLLEGE V. NATIONAL CHAUTAUQUA COUNTY BANK (S 9) CARDOZO: College

was having an endowment drive – asked Johnson for contribution. She signed and delivered a promise pledging $5000 payable 30 days after her death to be used for scholarships for ministry students named after her. She paid the first $100 before her death, then she repudiated the promise. Upon her death the school sued for the remainder. Cardozo held that there was consideration – in return for the money, school named fund after

Johnson (to promote her memory) Cardozo is proponent of promissory estoppel, but he is illustrating that even using Hamer

formalism you can get the same result as you would by using promissory estoppel. Promissory estoppel should be applied

Reliance was reasonable, foreseeable, and present Under this doctrine, charities do not have to show reliance, otherwise, they might never get

money Damages were obvious

FEINBERG V. PFEFFER (PG. 23): Plaintiff was offered a salary increase and a retirement plan. She was told she could quit at any time. She worked for 1 and ½ years longer and then resigned. At first her pension came, but then the president and his successor died. The next president decided to cancel her pension. Plaintiff sued and claimed she would not have quit at the time without her pension. Judgment for the plaintiff – under §90 there does not need to be consideration if a person

reasonably relies on a promise to her detriment. Note the sympathetic status of plaintiff – older woman with cancer. There is a clear connection between inducement and action – she would have worked longer and

had more money to live off in her old age. She was clearly induced to her detriment. Note the importance of having the promise written down – cautionary function is served (we know

the promisor clearly intended for her to have this money). Damages are quantifiable

HAYES V. PLANTATION STEEL (PG. 29): Defendant company told retiring plaintiff that they would take care of him. No money was discussed and P would have retired either way. Plaintiff received $5000, and it was implied that these payments would continue annually, and it was the president’s intention that they would. Hayes was never informed how long the checks would continue and he thanked the president after each check. President left the company and they stopped paying Hayes.

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Judgment for defendant – the employer’s decision did not shape the thinking of the plaintiff. There was no inducement to act. Hayes decided to retire before he knew about the money.

No reliance or consideration because this was all based on a past act. Important to remember that reliance has to be reasonable – cannot rely on a promise when you did

not know its true value More difficult to recover because there is no specific amount contract for

GOODMAN V. DICKER (S 14): Defendant distributors of Emerson encouraged plaintiffs to apply to become a franchise of Emerson. Defendant’s induced plaintiffs to incur expense in preparation for becoming a franchise after informing them that their application had been accepted. Judgment for plaintiffs on theory of promissory estoppel – on the word of defendants, plaintiffs

incurred expenses – they acted to their detriment on their faith in the conduct of the defendants. It did not matter that the franchise was terminable at will (defendants claim that this means that

plaintiffs should not have relied). Expectation damages were denied; only reliance granted

WALTERS V. MARATHON OIL (PG. 42): Marathon and plaintiff had continued negotiations regarding plaintiff’s desire to open gas station. Plaintiff bought land and began improvement. Negotiations broke down after Marathon had a moratorium on new applications and refused to sign paper. Judgment for plaintiff – court awarded expectation damages and gave Walters anticipated profit

because they gave up the opportunity to make other investments. Can occur when reliance damages are difficult to quantify

Status of the parties: notion of big and evil franchisers vs. little franchisee – courts are uniquely protective of franchise rights.

HUNTER V. HAYES (PG. 43): Hayes offered Hunter employment. In reliance, Hunter quit his current job. Hayes rescinded and Hunter was unemployed despite efforts to find employment. Judgment for Hunter – damages awarded based on monthly wage at old job. The damages should be tailored to fit the facts – compensate for direct loss, not expectation

damages. D & G STOUT V. BACARDI IMPORTS (PG. 37): D & G was a liquor distributor who was negotiating

sale because of loss of major suppliers. Bacardi was a supplier who promised to continue to supply. Based on this promise, D & G refused a sale offer. Bacardi then withdrew its account. D & G could not continue to operate and was forced to sell for $550,000 less than the other sale agreement. D & G sued for difference in sale offers. Judgment for D & G – measure of damages is reliance – reason the price went down is because

they relied on Bacardi. Like Goodman, decision is revolutionary because it allows sophisticated parties to collect even

though they have not made contracts like they should have (§90 can be used in the commercial context).

HOFFMAN V. RED OWL (PG. 538): Defendant’s agent promised plaintiff that defendant would give plaintiff a supermarket franchise for $18,000. Plaintiff purchased a small store to gain experience – it was profitable. Then defendant required plaintiff to sell the store just before the profitable summer months began. Plaintiff was then required to put up $1000 for an option on land to build the store, and was told he would get the franchise as soon as he sold his bakery – which he did. The amount plaintiff would have to contribute was raised to $24,000; then an additional $2000 was required. Some of plaintiff’s money was a loan from his father-in-law; defendant required that the loan be changed to a gift. Plaintiff brought an action for damages based on his reliance and defendant’s nonperformance. Court held for plaintiff – the doctrine of promissory estoppel applies. Even though the promise which is relied upon by plaintiff does not contain all of the necessary

essential elements to form a contract, promissory estoppel applies. P relied on promise to his detriment and fulfilled his end of bargain.

Court hints at opportunism here – that the price of the franchise kept increasing. Court’s decision creates a barrier to entry for the Hoffmans of the world – Red Owls will be less

likely to negotiate with them and Hoffmans will have more trouble in the expensive world of promissory estoppel litigation.

QUANTUM MERUIT (QUASI CONTRACT) Difficult to win these cases; use only as a last resort Requires an implied promise: an extraordinary basis for recovery

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o Without an explicit promise, recovery will be much more difficult; yet, still possible Social context is important (neighbors v. employment) Restitution Damages: when one person confers material benefit on another, the court will look to see

how much the wrongdoer has benefited and then the court will require the return of the specific benefit.

o Costs of other party are irrelevant. Benefit conferred must be the type that is ordinarily paid for (leads to court’s subjectivity) Restatement §86. Promise for Benefit Received:

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under subsection (1) if: (a) the promisee conferred the benefit as a gift or for other reasons the promisor has not been

unjustly enriched, or (b) to the extent that its value is disproportionate to its benefit.

WEBB V. MCGOWIN (PG. 173, 176): Webb was cleaning his employer’s floor by dropping logs to the lower floor. McGowin was below in the area where the wood fell. To save McGowin, plaintiff held a block and fell with it – he was maimed. McGowin agreed to provide for plaintiff for the rest of his life. He paid until he died, and his successors then stopped payment. Webb sued McGowin’s estate for the rest of the money. Judgment for Webb – saving someone’s life is consideration, so this is an enforceable contract. Bernstein: consideration was not present, but an extraordinary benefit was conferred Distinction from Mills Mills wanted to protect from fleeting moments of gratitude – McGowin made payments for nine

years. Mills promised for benefits conferred to son; here, benefits were to promisor

Posner: reconstruction of the hypothetical bargain – if Webb and McGowin had an opportunity to bargain, we can imagine that McGowin would pay

Quasi-contract – when one party gives a benefit to another, they should receive something in return – courts base quasi-contract on what is ordinarily paid.

HARRINGTON V. TAYLOR (PG. 177): Defendant assaulted his wife and he took refuge in plaintiff’s home. Wife went to plaintiff’s home and defendant assaulted her again. Wife knocked him with an axe and was going to kill him when plaintiff stopped her. Plaintiff’s hand was mutilated. Defendant orally promised to pay, but did not. Judgment for defendant – a humanitarian act is not consideration. Illustrates courts’ reluctance to use quasi-contract. There is a clear mutual benefit, but no

recovery. Distinguishing Webb

Employment v. neighbor context. This is in the neighbor context and the court wants to encourage neighbors to do nice things for each other.

Webb also made payment for a period of time CONTRACTS IMPLIED IN LAW

There is no implied or explicit promise in these situations. Rather there is an obligation imposed by the operation of law for reasons of public policy – it is a dangerous doctrine but courts recognize this – it is rarely used.

Can occur irrespective and contrary to parties’ intent Invented to allow recovery in particular situations – encouraging rescue, especially if people have

experience in medicine/rescue services. Deals with unjust enrichment and public policy; intent of parties is irrelevant Damages are measured by the benefit conferred IN RE CRISAN ESTATE (S 16): Patient was an 87 yr. old widow with no relatives. She collapsed in a

store and was taken to the hospital. She remained there for 14 days and then was transferred – she died. She owned a home and was held responsible for cost of care. Appellant argued that she had no opportunity to bargain. She must pay – there is an implied promise to pay for emergency services rendered to an

unconscious patient.

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No Hamer consideration and no §71 bargain theory consideration. No promissory estoppel because she was not awake at the time.

Court says there is an obligation based on public policy. If she were wearing a tag saying that she did not want medical care, then they could not give it; otherwise, we want to ensure people provide emergency care

Frequently (probably here) when you can win on a contract implied in law you can also win on a quasi-contract theory.

Damages were awarded based on doctor’s fees. CONRACT IMPLIED IN FACT

Equal to a contract in every sense except that doctrinal requirements of a contract may be circumstantial

Intent of parties to make a contract must be shown (Unlike those contracts Implied in Law) Benefits conferred are irrelevant Damages mirror those as if the contract were made (expectation usually) BASTIAN V. GAFFORD (PG. 485): Plaintiff agreed to construct building on defendant’s land. Plans

were completed by plaintiff. Bank told defendant he could only get financing with a firm bid from a contractor. Plaintiff said he only worked on a cost-plus basis. Defendant hired a new contractor. Judgment for the plaintiff. The court below found for the defendant, but it did not distinguish

between contract implied in fact and quasi-contract. The lower court based its theory on unjust enrichment – but there was none because defendant never used plaintiff’s plan.

Unjust enrichment is necessary for recovery based on quasi-contract but it is irrelevant for contract implied in fact – benefit conferred is relevant in quasi-contract and irrelevant to a contract implied in fact.

For contract implied in fact, it is enough that the defendant requested and received the designs, which would imply an agreement that he would pay for them.

HILL V. WAXBERG (PG. 486): A contract implied in fact is based on the intention of the parties. It happens where the court finds that the parties intended to make a contract but did not do so. A contract implied in law is based on the idea that one who is unjustly enriched at the expense of another is required to make restitution – it has nothing to do with the intention of the parties. Court suggests when the basis of recovery is contract implied in fact, the damages should be the

same as if the contract were made legally. In contrast, if the contract is implied in law, then the basis for recovery should be limited to the amount of damages conferred on the other party.

II. INEQUALITY IN THE EXCHANGE INADEQUATE CONSIDERATION

Issue of when the courts should step in and protect people from their own contracting mistakes BATSAKIS V. DEMOTHESTIS (PG. 50): Greek man lent woman 500,000 drachmae, which is equal to

$25 during WWII so she can get home. She promises to pay him $2000 in return when she gets back to the U.S. She then refuses to pay upon return. Court held that the contract was valid – the court will not examine the contract between the parties

to determine whether the consideration received by each side was equivalent. Due to the situation with the war, the money was particularly valuable and the woman needed the

money immediately, which altered its value. Consistent with Hamer: value of consideration is irrelevant so long as benefit conferred in

exchange for benefit received SCHNELL V. NELL (PG. 11): Schnell’s wife died and she left plaintiff $200. She had no provisions to

provide this sum as everything she had she owned jointly with her husband. Husband entered contract saying he would pay the $200. He planned to give them the money in installments for 1 penny of consideration. Court held that 1 penny was not adequate consideration – you cannot use moral consideration to

uphold a promise. Penny did not induce the promise – it only fulfilled the formality so as not to be construed as a

gift. Court makes an exception to the rule that inadequate consideration will not void a contract

because in this case it is easy to determine the objective value of the sums exchanged. In Batakis, money could have saved P’s life by allowing her to leave

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UNCONSCIONABILITY This has a statutory basis in the UCC and a common law basis Unconscionability raises the question as to what extent individuals should be allowed to exercise their

autonomy and enter into any contract regardless of its terms. 2 Types

o Procedural: Defense related to the process of contracting, including things like fraud and duress.

o Substantive: Based on the result of the contract, includes things like illegality. Difficult to prevail on substantive uncscionability alone; would have to be an

extraordinary case Definition

Absence of meaningful choice on the part of one of the parties, measured by Disparity in bargaining power between the parties and The manner and circumstances under which the contract was entered into, including whether

meaningful terms were hidden, subjective understanding of the parties, and prevailing business norms, combined with;

o Contract terms unreasonably favorable to the other party.o Toker v. Westerman definition

A bargain that no one in his sense would make and no honest and fair person would accept. Must be an inequity so strong that no one with common sense could look at the contract without producing exclamation.

UCC §2-302. Unconscionable Contract or Clause: Applies only to transactions for sale of goods(1) If the court as a matter of law find the contract or any clause of the contract to have been

unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making that determination.

HENNINGSEN V. BLOOMFIELD MOTORS (S 23): Hennigsen bought a new car. Ten days later the wheel spun in his wife’s hand and the car was destroyed. Wife sued for injury and husband sued for losses. Both claims were based on breach of implied warranty. Defense relied on warranty disclaimer written in small print that removed liability for personal injuries. P said he did not read the disclaimer. Judgment for Henningsen – warranties are meant to protect consumers. There was bargaining power – it is take it or leave it. In addition, the warranty was used by most

car companies, so going to another company would not help the consumer. Not an unconcsionability case: more of public policy case and a signpost case There was an inequality, no opportunity to bargain, and there was complexity beyond the

comprehension of the layman – the court intervenes in the interest of the public good. WILLIAMS V. WALKER-THOMAS FURNITURE (PG. 61): Plaintiff had bought things from the Walker-

Thomas furniture store that she was paying for in installments. There was a contract for the terms of the purchase that indicated that the buyer would pay in monthly installments until she had paid off the entire item and then it would become hers. Up until that point, it belonged to the store. The contract also said that if a customer defaulted, the company could repossess all items purchased at the store by the purchaser (cross-collaterization provision). The appellant defaulted, but claims that this contract is unenforceable based on its unconscionability. Judgment for customers – contrary to public policy and therefore unconscionable. The court said that the contract terms were too unfavorable to the other parties – there were no

meaningful choices – appellant could not understand the terms of the contract. Williams was a welfare recipient with 7 children. She made $218 per month on welfare. She

purchased several appliances form the furniture store, the last being a $500 stereo. The store was in a very poor area and advertised easy credit on desirable goods.

Why did the store have this clause in the contract – are prices going to rise if the court strikes this sort of contract down? Will Williams be shut out of the market?

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If the contract is unconscionable, but not void due to fraud, then the court will only allow D to recover what equity demands.

TOKER V. WESTERMAN (PG. 74): Plaintiff, selling door-to-door, sold a refrigerator to defendant under installment contract. Price was $899, and with tax, etc… it came to over $1200 to be paid over 3 years. Defendant made payments for a while and then began resisting when he realized that unit was overpriced by hundreds of dollars. Judgment of defendant – contract was unconscionable. A normal person who understood this contract would not have signed it – price is too

unreasonable to enforce. Courts do not usually find unconscionability based on price alone, but they are hostile toward door

to door salesmen – usually courts look to defects in bargaining prices (procedural). MUTUALITY OF OBLIGATION

Batman Test: can one party go home and watch Batman without really breaching the contract. Conditional Promises – as long as the promisor has actually limited his future options in some manner,

a conditional promise (one which the promisor need perform only if a specified condition occurs) is not illusory – because if the condition occurs, the promisor must perform.

Language matters here – neither side of the contract can make an illusory promise. Making a promise that appears to be a promise in form, but is not in substance, does not obligate in any way.

This is a quintessential formalist doctrine, it is based on consideration. Mutuality and unconscionability are historically comparable, as they were both developed to police

abuses of contracts. Code makes outputs and requirements contracts enforceable that were not enforceable under common

lawo Only areas in which the Code is different (beyond) common law

WICKHAM & BURHAM COAL V. FARMER’S LUMBER CO. (PG. 95): Seller, P, agrees to ship to the buyer, D, all the coal that they want to buy. The buyer sues the seller for not being able to get coal when the seller refuses to sell. Seller says that contract is non-binding because it was illusory. Contract lacks mutuality of obligation because defendant was not obligated to do anything. The

defendant could order coal as he pleased. A contract to sell personal property is void for want of mutuality if the quantity to be delivered is

conditioned entirely upon the will of the buyer. Partial performance did not prove existence of a contract This case is not cited anymore because under the UCC it would be decided differently.

Output and requirement contracts are legal and explicitly enforceable under the UCC. Such contracts do not fail because parties are bound to use good faith and commercial

standards, industry customs, and prior output/orders can be considered Usually easier to measure all that party needs than all that party wants

UCC §2-306. OUTPUT, REQUIREMENTS AND EXCLUSIVE DEALINGS: (1) A term which measures the quantity by the output of the seller or the requirements of the buyer

means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller of the buyer for exclusive dealing in the kind of good concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the good and by the buyer to use best efforts to promote their sale.

MIAMI COCA-COLA BOTTLING CO. V. ORANGE CRUSH (PG. 98): Orange crush gave the licensee exclusive right to manufacture the drink in an area and agreed to supply concentrate for the operation. The licensee agreed to manufacture and distribute the drink under the manufacturer’s trademark. The licensee also agreed to purchase an amount of the concentrate and promote the drink. The licensee was entitled to cancel at any time but the licensor was not. Manufacturer asked to prevent licensee’s attempt to cancel. Court held that contract was void for lack of mutuality. The manufacturer was liable to the

licensee for damages occurring during the performance, but the contract was not binding – the licensee did not promise to do anything since it could stop at any time. Unrestricted cancellation clause

If there had been a cancellation clause that required notice, it would probably have not been void.

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LINDNER V. MID-CONTINENT PETROLEUM CORP. (PG. 99): Lindner leased a filling station to Mid for 3 years with an option in Mid to renew for 2 more. Mid had the right to terminate at any time upon 10 day’s notice. Lindner tried to cancel and Mid brought suit. Lindner claims no mutuality of obligation. Finding of the plaintiff – mutuality of obligation does not mean that the obligations must be

exactly the same. At the very least, lessee bound itself to pay rent for ten days. The fact that one party could back out and the other party could not does not invalidate the

contract. GURFEIN V. WERBELOVSKY (PG. 99): Contract for sale of glass to be shipped within 3 months

stating that buyer can cancel before the shipment. The buyer repeatedly requested performance during the 3 months and then brought suit for breach of contract. The seller said cancellation clause was an option for which there was no consideration, so the contract lacked mutuality of obligation. Court held for the plaintiff (buyer) – there was consideration because the seller could have bound

the buyer by shipping the glass before the buyer could cancel. Seller had “one clear opportunity to enforce the entire contract”

MATTEI V. HOOPER (PG. 100): Plaintiff wanted to build adjacent to defendant’s land. He submitted an offer to buy the land and the offer was accepted. Parties had an agreement that plaintiff would deposit $1000, then there would be 120 days to examine and consummate the $57,000 purchase. Contract said that agreement was subject to real estate broker getting leases satisfactory to purchaser. Defendant notified that he did want to sell and claimed that the promise was illusory. Court held for plaintiff – satisfaction clauses can be allowed in contracts Court held that not every promise that is conditioned on one party’s performance is illusory – 2

exceptions: (1) satisfaction based on objective reference outside of the contract; and (2) satisfaction based on fancy/taste – must exercise “good faith”

“Good faith” provision serves function of notice provision LIMA LOCOMOTIVE V. NATIONAL STEEL (S 37): Written agreement that said that required buyer to

purchase all steel from seller. The seller agreed to furnish all requests in steel casting for the rest of the year at a given price in return for the tonnage that the buyer wishes to order during the following month. Seller knew that buyer needed steel castings – seller was not proposing to do more than needed for

known business. Buyer was obligated to buy all steel from seller required for his business; different than “all he

wanted.” Court outlines the common law preview of the UCC for enforcing requirements contracts.

LACLEDE GAS V. AMOCO (PG. 106): Parties had a written agreement by which Amoco provided propane gas to developments until natural gas mains were extended into these areas. The contract said that Laclede could cancel for a variety of reasons at any time, but it did not have a parallel provision for Amoco. In order for Laclede to cancel it had to give notice – and there were other restrictions on its cancellation right. Court held for Laclede – a binding contract is not rendered invalid merely because one party has a

right to cancellation which the other party does not have. In order for a cancellation right to make a contract void it would have to be unrestricted or

arbitrary. Formalist decision

GOOD FAITH AND FAIR DEALING A more modern way to police contracts. Has both a common law and statutory basis in the UCC. The things that you do and say during negotiations and after the formation of the contract cannot affect

the court’s decision regarding this doctrine. The duty of good faith cannot be waived from contracts; it is a mandatory not a default rule. UCC §1-203. Obligation of Good Faith: “Every contract or duty within this Act imposes an

obligation of good faith in its performance or enforcement.” WOOD V. LUCY LADY DUFF GORDON (PG. 104) CARDOZO: Wood (P) was given an exclusive

contract to place Lucy’s (D’s) endorsement on the designs of other clothiers and to place D’s own designs on sale and to license others to sell them. D was to receive one-half of P’s profits. The

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contract indicated that P had an organization capable of performing the contract, but it did not expressly indicate that P would perform. P sued D for breach of the contract on the basis that D put her endorsement on clothes of a competitor without P’s knowledge and with no share of the profits to P. D demurred, claiming that the agreement lacked the elements of a contract since P bound himself to do nothing. A promise that P would use reasonable efforts to promote D’s goods is fairly implied Might be difficult to reconcile with Wickham and Batman given lack of mutuality

Cardozo finds implied “reasonable efforts” to find that there is mutuality – “a promise may be lacking, and yet the whole writing may be ‘instinct with an obligation imperfectly expressed.”

Good faith saves us the need to write out a long and complex contract for Lucy explaining exactly what we want Wood to do, although it leaves it up to the court to decide what Wood is supposed to be doing.

Complex contracts with too may details can be costly and risk transaction breakdown – although having a contract that can be resolved on summary judgment is cost effective and good faith decisions cannot be made on summary judgment.

FELD V. HENRY LEVY & SONS (S 41): Plaintiff and defendant had agreement that defendant would sell plaintiff all bread crumbs made in its factory in a year. Contract could be cancelled on an annual basis with 6 months notice. Defendant stopped production claiming it was very uneconomical. Defendant claims that contract does not indicate that he actually has to produce, rather it just says that he must sell what he produces to plaintiff. Court held for plaintiff – court finds that output contracts rest on the notion of good faith output –

defendant is supposed to sell to plaintiff a reasonably foreseeable amount of bread crumbs. Court senses opportunistic behavior here – bothered by post-shut down bargaining §2-306 Comments 2 and 3 addresses situations where one party goes out of business

CORENSWET V. AMANA (S 44): Parties had a contract that indicated that they could terminate at any time for any reason with 10 days notice. Amana terminated – Corensweet sued to enjoin termination, claiming it lacked good faith. Court held for Amana – contract said parties could terminate for any reason, and Amana had a

reason – wanted to give business to a new company. Some courts rely on §1-203 (good faith clause); others rely on §2-309 to uphold termination

clauses Court here says good faith clause should not override express terms of contract

BUSHWICK-DECATUR MOTORS INC. V. FORD MOTOR CO. (S 46): Bushwick and Ford had a dealership agreement. Agreement said that company agrees to sell and dealer agrees to purchase Ford cars. The contract said either party could terminate at will by mail or in person and that will cancel all orders received but not delivered. Ford terminated – plaintiff claims it was malicious and in bad faith. Plaintiff suffered substantial losses. Court held for Ford; again it did not want to read good faith into an express contract provision Court held that if there was a policy reason not to enforce this sort of contract, it was for the

legislature to address. If more binding contracts are required for franchising agreements, franchisers will be more

hesitant to create agreements, transaction costs will increase and the smaller person will be shut out by increased entry barriers.

ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE CO. V. RIVER VALLEY COOKIES (S 51): Sigels had a franchise to operate a cookie company store. The company terminated their franchise, but Sigels continued to operate under the company’s name while using a different product. The company sued to enjoin the Sigels from operation. The Sigels counter-sued saying that the franchise had been terminated in violation of the franchise agreement and the Illinois Franchise Disclosure Act – they moved to force the company to restore their franchise. Court held for the cookie company – Sigels violated the terms of the agreement in many ways

over a year – grounds for automatic termination of the contract Posner decision focuses on 3 things: (1) terms of the contract; (2) common law duty of good faith

in franchise termination provision (UCC does not apply because not sale of goods); and (3) reliance on statute (Illinois franchise termination statute) which requires good faith when terminating contract

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In terms of good faith, Posner wants to prevent some specific forms of manipulative strategic behavior.

Posner thinks that court should not step into contract because the court cannot redistribute between the parties without increasing costs

III. Toward the Objective Theory of Contract MUTUAL ASSSENT

Mutual Assent: parties to a contract must indicate in some way their attempt to be bound. Add Notes from 360 Peerless is the high watermark of the subjective intent and Embry is the high watermark of the

objective intent; courts have generally adopted the Embry standard but vary greatly on its application, which can be subjective.

o Peerless: parties’ intent is very relevant; o Embry: it is irrelevant; only what reasonable person would have thought is relevant

RAFFLES V. WICHELHAUS (“PEERLESS”) (PG. 354): Defendant agreed to buy cotton to be shipped by plaintiff to England from India aboard the ship “Peerless.” Defendant refused to accept delivery, indicating that he meant the “Peerless” leaving Bombay in October, not a different ship “Peerless” leaving in December. P sued for breach. Court held for defendant – he bought the cotton that came on the October ship, which was the ship

he believed he had contracted for. There was no meeting of the minds on the issue of which boat – there must be assent for there to

be a contract. There must be a meeting of the minds as to material terms – material terms are wineries (as

opposed to warehouses). Court says that if there is a contract for goods in two warehouses and they are exactly the same,

the contract is satisfied by goods from either warehouse, even if the contract asked that they be from a specific one.

The goods in this case were not a warehouse but a winery – it matters when they arrive, as the cotton market fluctuates – to impose the later goods on the defendant would be to impose an entirely different contract.

FLOWER CITY V. GUIAMA (PG. 599): Guiama construction subcontracted with Flower (new business) for painting a new housing development. Part of the reason they hired Flower was that they needed minorities to be included in the project. The terms of the project included a price per unit. One year after contracting, Flower asserted that the contract only required painting of interior walls and not all of the extras. Defendant claimed that work in question was covered under the contract (trade usage). Defendant cancelled the contract and plaintiff sued for damages. Court held for the defendant on the ground that no contract had been formed – there was

ambiguity – each party thought they were contracting for different things. Court is applying an Embry standard because it looked at what Flowers could have reasonably

thought. Neophyte exception – we are putting the burden on the big contractor to tell the neophyte of the

usage of trade – big contractor is the best/cheapest cost avoider. Problem with neophyte exception is that it increases costs of doing business with them – which

discourages the practice altogether. EMBRY V. HARGADINE MCKITTRICK (PG. 356): Plaintiff had a written contract of employment with

defendant for one year, ending December 15. He indicated he talked to defendant’s president several times about re-employment and that on December 23 he told president that he could not continue to work without another yearly contract, the president saying, “Go ahead, you’re alright.” In February, defendant gave plaintiff a termination notice. The judge instructed the jury that if it believed plaintiff’s testimony, in order for defendant to be liable under a contract, it had to find that both parties intended to contract with each other. Judgment for defendant and plaintiff appeals. Court held for plaintiff – jury instructions were improper – a person’s subjective intent is

irrelevant. It is what a reasonable person would believe about the promisor’s conduct or words that counts

Here, a reasonable person would interpret the president’s actions as an assent to a demand for a year’s employment contract.

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LUCY V. ZEHMER (PG. 350): Plaintiff sued defendant to obtain specific performance of an alleged land sales contract. The contract was written, specified a price of $50,000 and was signed by defendant and his wife. Defendant had declined several previous offers to sell the land but one night (after a lot of drinking) at defendant’s restaurant, plaintiff offered $50,000. There was a dispute over what was actually said and done, but he signed document resulted. Defendant claimed it was only in jest – to test if plaintiff could really come up with the money. Court held for plaintiff – the extent of the negotiations and the rewriting of the initial contract (on

a bar napkin) indicate that the contract was a serious business transaction. Court held that plaintiff was justified in actually believing the contract represented a good faith

sale and purchase of the farm; applies Embry standard (reasonable person). The mental assent of the parties is not required for the formation of a contract; a person’s

undisclosed intention is immaterial if his/her words and acts have but one reasonable meaning. KABIL V. MIGNOT (S 63): Plaintiff needed defendant’s helicopter service for a construction job in the

forest. Defendant claims that plaintiff was told that the site was not safe and that the job was not economical for defendant, and that defendant would not do it. Plaintiff claims that at first meeting figures were discussed, and those figures were used in plaintiff’s bid for the construction job and that at subsequent meeting, plaintiff informed defendant that bid was accepted and defendant assented to the job. Defendant did not perform the services and plaintiff used another helicopter service at a higher cost. Court held for the plaintiff – communication and overt acts (objective view and Embry) must

apply to contract formation, to test whether the parties agreed, as well as on what they agreed. NEW YORK TRUST V. ISLAND OIL (S 65): Island Oil set up sham subs that had accounts due from

Island Oil. A sub was bought by third-party who sued D to collect money. No reasonable person in the situation would have understood this to be a contract between D and

former subs was a particular type of contract. Again, follows Embry standard but looks at context.

IV. Indefinite Agreements Issues of assent and indefiniteness are closely linked. The general view is that it is impossible for parties a complete contingency contract. The hypothetical

perfect, clear contract covering every possibility cannot exist. Court fills in the gaps when the parties’ intent and reasonable expectations are clear.

o Less certainty is required to fill in the gaps when there has been substantial reliance and performance.

o Greater degree of certainty is required when specific performance is sought When do you want to leave gaps in agreements? Does putting a term in a contract make future

negotiations impossible? When do parties want to leave room for flexibility? The mere presence of a clause in a contract does not make it impossible for future negotiations. But it

sets a standard term for negotiations. Contract provisions do not limit flexibility always. You can depart by mutual consent. Having the provision does change the distribution of bargaining entitlements.

Consider possible renegotiations when you put definite terms in a contract. Also consider if you want terms that will confine you or the other party when it is renegotiations time.

There are many reasons to leave gaps in contracts: flexibility, cannot decide, oversight. Sometimes if you are at a contracting block it is better to put in a WISE MAN PROVISION then to

leave blank. Can sometimes win these cases on promissory estoppel grounds if contracts fail for indefiniteness. UCC §2-204. Formation in General:

(1) A contract for sale of good may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

See also Southwest for requirements

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UCC §2-305. Open Price Term: (1) The parties if they so intend can conclude a contract for sale even though the price is not settled.

In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by

a third person or agency and it is not so set or recorded. (2) A price to be fixed by the seller of by the buyer means a price for him to fix in good faith. (3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through

fault of one party, the other may, at his option, treat the contract as cancelled or fix himself a reasonable price.

(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed, there is no contract. In such case the buyer must return any good already received or if unable to do so must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

The test under the UCC is whether parties intended to make a binding contract Litigating under good faith provisions can be costly. Price is treated as warehouse rather than winery; different from common law While this provision may have been written to protect smaller parties, it will often makes things

more costly and potentially prohibitive for them JOSEPH MARTIN V. SCHUMACHER (PG. 513): Defendant leased plaintiff a retail store for a 5-year

term ($500 per month with gradual increases to $650) with a renewal clause that tenant “may renew this lease for an additional period of five years at annual rents to be agreed upon.” Plaintiff gave timely notice of intention to renew, and defendant made it clear that it would do so only with a rental starting at $900 per month. Plaintiff engaged an appraiser who said the market value was $545 per month. Plaintiff brought action for specific performance to compel defendant to extend the lease at market value. Court held that the contract was unenforceable – there was no method to determine future rent –

indefiniteness problem. A mere agreement to agree in which a material term is left for future negotiations is

unenforceable. Neither party wanted to risk changes in the market to specify what the rent would be 5 years down

the road – bad lawyers way of maintaining flexibility – could have included some reference to market price (enforceable)

Joseph Martin side – reluctance to fill in contractual gaps v. UCC side – willingness to fill in gaps based on “reasonableness.”

If arguing in front of Cardozo, you would want to argue “good faith.” ACADEMY CHICAGO PUBLISHERS V. CHEEVER (PG. 504): Publishing Co. had agreement with

Cheever’s wife. Company wanted to publish collected works of Cheever’s short stories. They agreed that the defendant would deliver to plaintiff a copy of the manuscript, and that plaintiff would use such style and manner as it deemed best, but they made no mention of who would decide which stories would be included, or how many stories or pages would be included. Plaintiff located over 60 uncollected stories which it delivered to defendant, defendant informed plaintiff that she objected to publication of the book. Plaintiff sued for declaratory judgment granting plaintiff the right to publish the book and ordering defendant to deliver the manuscript. Court held for defendant – contract was not valid – does not specify the number of stories or

pages, who will decide what stories will be included, what criteria would make the manuscript acceptable to plaintiff, or even a certain date for delivery or publication.

Courts may supply a missing material term where the parties intended such a term to be supplied by implication. Here, the trial court supplied specific terms to make the contract enforceable, but the contract did not provide a standard for the court to apply – a court cannot rewrite a contract and spell out essential terms not provided for. Although parties may have intended to make a contract, if the content of the their agreement

is unduly uncertain and indefinite, then no contract is formed

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For a valid contract to be formed, an offer must be so definite as to its material terms or require such definite terms in acceptance that the promises and performance rendered by each party are reasonably certain.

CASSINARI V. MAPLES (PG. 514): A lease provided that a lessee had “the exclusive right to secure a new lease upon the property covered hereby for an additional period of five years … upon the same terms and conditions as herein set forth, at a monthly rate to be determined at that time.” Court held that contract was enforceable – all terms and conditions of the renewal are settled,

leaving only the rental price to be later determined – court can fix rent. It is appropriate to enforce such a provision since the clause for renewal constitutes part of the

consideration for the original lease, and was without question intended by the parties to have meaning and to be effective.

Different from Martin: here, only future rental price was undetermined and renewal clause was meaningful part of original agreement In Martin, all of the terms for future renewal were uncertain

BERG V. SLEEPWORLD (PG. 507): Bressman and Lustwig signed documents setting out terms for renting a vacant commercial building. Bressman claims it is binding, Lustwig claims it was only a preliminary agreement. Court held that the agreement was binding – it was detailed and contained all elements of a

commercial lease. It is not necessary that everything be provided for the contract to be definite enough.

REGO V. DECKER (PG. 508) Primary purpose of the law of contracts is the attempted realization of reasonable expectations that

have been induced by the making of a promise. Courts should fill gaps in contracts to ensure fairness where the reasonable expectations of the

parties are fairly clear – court should not impose on a party any performance to which he did not and probably would not have agreed.

A greater degree of certainty is required for specific performance than for damages. Less certainty is required where the party seeking specific performance has substantially shifted

his position in reliance on the supposed contract, then where the contract is wholly unperformed on both sides.

AROK V. INDIAN CONSTRUCTION SERVICES (PG. 509) PRO gap filling and enforcing indefinite agreements – the enforcement of incomplete agreements

is a necessary fact of economic life. Refusing the enforcement of obligations the parties intended to create and that marketplace

transactions require hardly seems the solution. SOUTHWEST V. MARTIN TRACTOR (S 67): Plaintiff wanted to submit bid to U.S. Corp of Engineers

to construct facilities. Before submitting the bid, he checked with Hurt for price on generator. Hurt gave a quote and then Southwest submitted a bid relying on the figure. Hurt then informed them that the generator would be much more expensive. Hurt tried to cancel the agreement. After a fight, Hurt agreed to fill the order – but he did not do it. Southwest sued. Court held that there was an enforceable contract. Three definite and invariable requirements as to the writing of a contract: (1) it must evidence a

contract for the sale of good; (2) it must be signed (any authentication which identifies the parties to be charged; question is always whether the symbol was executed or adopted by the party with the present intention to authenticate in writing); and (3) it must specify quantity.

Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

Where parties have reached an enforceable agreement for the sale of good, but omit therefrom the terms of payment, the law will imply, as part of the agreement, that payment is to be made at the time of delivery. UCC 2-305: Unspecified price is determined by reasonable market price (warehouse); as

opposed to common law, which treats price as winery CHANNEL HOME CENTER V. GROSSMAN (PG. 515): Defendant purchased a mall that needed

refurbishing. He approached plaintiff to see if they were interested in leasing space in the mall. When plaintiff showed interest, defendant requested a letter of intent that defendant would help secure

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financing. Plaintiff provided the letter of intent that provided that defendant agree to withdraw the space from the market and that plaintiff obtain the necessary zoning permits. Plaintiff sent defendant a copy of the draft lease, and the parties continued negotiations. A competitor of plaintiff, Mr. Good Buys, contacted defendant about the space in the mall and defendant began discussing a possible lease. Later, defendant told plaintiff that negotiations were terminated because plaintiff did not provide a mutually acceptable lease within 30 days after the letter of intent. The next day, defendant signed a lease with Mr. Good Buys for a higher rent that plaintiff had negotiated. Plaintiff sued for breach of contract. Court held that the letter of intent was a binding agreement to negotiate in good faith – parties are

bound to an agreement if both parties intended to be bound – here both parties intended to be bound to negotiate in good faith – there was also substantial consideration and substantial definiteness.

Defendant’s promise to withdraw the space form the market and negotiate with plaintiff is sufficiently definite to be enforced.

Defendant claims there was no consideration; but letter of intent plaintiff gave to defendant was very valuable for defendant as it helped secure financing.

Three-part test: (1) whether both parties manifested an intention to be bound by the agreement; (2) whether the terms of the agreement are sufficiently definite to be enforced; and (3) whether there was consideration.

A/S APOTHEKERNES V. I.M.C. CHEMICAL GROUP (PG. 522): Letter of intent does not constitute a binding contract – the purpose and function of a preliminary

letter of intent is not to bind the parties to their ultimate contractual objective, but rather to provide the initial framework from which the parties might later negotiate a final agreement.

WHEELER V. WHITE (S 70): Wheeler owned land in Texas where he wanted to build a building. He had agreement with White where White was to obtain loan for Wheeler and if he could not, then White was to loan the money himself. White promised the money. Wheeler, in reliance on this promise, tore down the old building on the site. White refused to pay. Court held that there was no binding contract. However, where there is actually no contract, the promissory estoppel theory may be invoked,

thereby supplying a remedy that will enable the injured party to be compensated for his foreseeable, definite and substantial reliance; verdict for Wheeler on promissory estoppel grounds.

PE does not require the same degree of definiteness in the business context that a contract would.V. Contract Formation through Offer and Acceptance OFFERS

The law of offer and acceptance has become very context specific and is much less formal then it used to be.

The inquiry into whether there has been an offer or not is related to mutual assent and whether terms are sufficiently definite for the promise to be legally enforced. Look to specific language, like “offer” versus “quote” in deciding whether the parties intended to

be bound. Advertisements are generally mere invitations to deal – look to Lefkowitz test. Ease/Difficulty in calculating damages is important to determining whether there was a contract. LONGERGAN V. SCOLNICK (PG. 374): Plaintiff responded to a newspaper ad for a house. He wrote to

seller saying that he was interested and went to look at the house. He then wrote saying that he wanted the house and discussed banking options. He received a letter urging to act quickly. He wrote back to buy, but the house was already sold. Court held that there was no contract – no meeting of the minds and no intention to create a

binding agreement. This is an Embry type approach despite the fact that it mentions meeting of the minds – what

would go through the mind of a reasonable person who received this letter; very formalistic Court also looks to the issue of mutual assent and if both parties intended to be bound.

LEFKOWITZ V. GREAT MINNEAPOLIS (PG. 377): On two occasions defendant published ads offering furs of substantial value for sale at $1 on a “first come, first served” basis. On both occasions, plaintiff was the first to present an acceptance, but defendant refused to sell on the basis of “store policy” that the offer was intended for women only. Defendant contended that the offer was “unilateral” and might be withdrawn without notice.

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Court held that it was an offer – test for whether a binding obligation may originate in advertisements addressed to the public is whether the fats show that some performance was promised in positive terms in return for something requested.

Where the offer is clear, definite, and explicit and leaves nothing open for negotiation, it constitutes an offer – acceptance of which will complete the contract. Advertisements are usually invitations to deal.

While the advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.

Showing up at the store is not enough to create acceptance or consideration – it has to ask you to do something more – show up first.

The fact that damages were easily quantified in second ad (v. first) likely affected the court’s decision.

FISCHER V. BELL (PG. 379): It was illegal to offer switchblades for sale. One appeared in the window of defendant’s shop – labeled ejector knife – 4 shillings. Court held it was not an offer but rather an invitation to deal – displaying an item with a price

alone is not an offer for sale. FAIRMOUNT GLASS V. GRUDEN MARTIN (S 73): Plaintiff wrote to defendant asking for price

“quote” on car load of green jars. Defendant responded quoting a price and labeling it for immediate delivery. Plaintiff responded and entered orders for carloads. Defendant responded that it was impossible to book order because output was all sold out. Plaintiff claimed there was an offer and acceptance, and, therefore, a contract. Court held for plaintiff. The language of the letter was an offer – the court determined that the

parties intended to be bound. For immediate release is evidence of an offer. Car loads are identifiable by standard industry practice.

Purchaser’s letter was plainly an inquiry for the price and terms on which supplier would sell the goods, and supplier’s answer was not a quotation of prices, but a definite offer to sell on the terms indicated, and could not be withdrawn after the terms had been accepted. Use of the word “quote” is usually just an invitation to deal; here, additional language

(“immediate acceptance”) was the deciding factor. NEBRASKA SEED V. HARISH (PG. 380): Defendant farmer wrote letter to plaintiff describing his seed

and stating, “I want $2.25 per cwt. For this seed f.o.b. Lowell.” Court held that the letter was not intended as a final proposition but rather as a request for bids. Court noted the use of word “want” rather than “offer” and that letter did not fix a time for

delivery or a definite and certain amount. MOULTON V. CRENSHAW (PG. 380): “We are authorized to offer… shall be pleased to accept your

order” was a mere invitation to deal. WILHELM V. BATTRUND (S 75): Defendant agreed to buy oil according to a schedule that was

dependent on weight of oil – specified price range and viscosity. Defendant repudiated before he placed any orders. Court held that it was not an enforceable contract – particular weights were not agreed upon, there

was no meeting of the minds or expression of mutual assent of price and quantity– too indefinite. Court did not want to find a contract because they would have to figure out what it was worth – it

would be too complex. Courts like to deal with damages that are easily calculated. Because the contract was not definite as to quantity and price, it would have been too difficult here.

WILLIAM WHITMAN V. NAMQUIT (S 75): Seller’s action for damages for buyer’s breach of a contract to buy 50,000 pounds of worsted yarn. Two species of white worsted yarn were described in the contract, each with a different price from the prices quoted in the contract. The price of each style and size could be computed by a scale known to and agreed by the parties. Defendant specified style and size for 1000 pounds but refused to give specifications for the remaining 49,000 pounds. Court held for the plaintiff – defendant could not escape liability under the contract for failure to

specify. Court awarded damages (which were calculable) of the profits P would have made by selling the

least profitable yarn In this case and Wilhelm, we have cases where the buyer does not specify what type of yarn/oil it

wants.

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Reconciliation: None; courts differ on opinion. TILBERT V. EAGLE LOCK (S 76) : Plaintiff worked for defendant and he had a life insurance policy

under the company (had to work for 5 years to get it). The defendants cancelled the policy, and workers were notified the day that plaintiff died. Court held that there was a binding contract – there was consideration (loyalty, lower turnover). Defendant could discontinue the benefit at any time, but it had to give prior, adequate notice.

LIMITS ON THE POWER OF REVOCATION Offeror may revoke at any time until the offeree begins to accept UCC §2-205. Firm Offers: An offer by a merchant to buy or sell goods in a signed writing which by

its terms gives assurances that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

DICKINSON V. DODDS (PG. 393): Dodds offered to sell property to Dickinson, indicating that the offer was to remain open until 9 a.m. on June 12. On June 11, plaintiff made up his mind to buy the property; in the afternoon plaintiff was informed by a third party that defendant had offered or agreed to sell the property to another person. In the evening, plaintiff delivered his acceptance to defendant’s mother-in-law and defendant finally got it at 7 a.m. on June 12. Defendant refused the acceptance since he had already sold the property on June 11. Court held that it was only an offer and the defendant was not bound until there was acceptance –

impossible to say there was ever that existence of that same mind between the parties which is essential in point of law to the making of an agreement.

The plaintiff learning that defendant was going to sell to another person was sufficient communication of retraction of the offer.

The precise order of events is very important – you cannot withdraw after acceptance. An offer can be revoked at any time prior to acceptance unless there is a legally enforceable

promise to keep the offer open for a specified period of time. No consideration was given here for promise to sell until acceptance; thus, no binding

agreement Very formalistic decision.

JAMES BAIRD V. GIMBEL (S 79): Defendant, subcontractor, sent out letter to all potential bidders for highway project, based on information provided by Department of Highway employee, offering all necessary linoleum for a certain lump sum. Defendant found out amount of linoleum was seriously underestimated and sent out letters withdrawing initial offer. Plaintiff, GC, before receiving withdrawal letter, made bid based on initial offer by defendant. Plaintiff was awarded the contract and accepted the offer. Defendant declined to recognize existence of contract. Court held that there was no contract – it was an offer because until plaintiff accepted the general

bid, it did not accept the sub bid. No mutuality of obligation D told P he withdrew before P told D he accepted Contractors do not accept bids from subs simply by submitting their own bids

Promissory estoppel did not apply; promise only once P agreed to take and pay for linoleum An offer for an exchange is not meant to become a promise until consideration has been

received, either a counter promise or whatever else is stipulated. Decision written by Hand, a formalist According to Hand, reliance should not turn a revocable offer into an irrevocable offer. If the

general wanted to hold the offer, it should have made a contract at the time of the bidding – there was no barrier to bargaining.

There was no acceptance; subs won’t make a habit of backing out of bids due to reputation concerns

Best risk-spreader is probably the general – best risk spreader and best loss minimizer are generally opposite.

DRENNAN V. STAR PAVING (PG. 404): Plaintiff/general was bidding for a contract. As is customary in the industry, defendant telephoned in a bid for subcontract – defendant’s bid was the lowest and plaintiff’s based his bid on defendant’s price. Plaintiff was awarded the contract. Defendant claims to

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have made a mistake and more than doubles its price immediately after plaintiff informs defendant that bid was accepted. Court held there was no contract but there is a reliance claim according to promissory estoppel.

PE played role of making the offer irrevocabale; reliance negated the irrevocability Plaintiff’s reliance was foreseeable by defendant and plaintiff relied to its detriment – that makes

defendant’s offer irrevocable. Traynor is saying that once you start accepting, revocation is more difficult.

Appears haunted by Cardozo’s ghost If you commence the act of acceptance and no time period is specified, once the offeree

commences acceptance he has a “reasonable time” to complete acceptance, and the offeror cannot revoke during this period.

DON’T CITE THIS CASE AS PROMISSORY ESTOPPEL RECOVERY CASE PRELOAD V. AB&J (PG. 408)

Bid Shopping: general contractor’s seeking of bids from subcontractors other than the one whose bid amount the general used in calculating its own bid, and often involves the general’s informing the other subcontractors of the amount of the low bid and inviting them to undercut it.

Bid Chiseling: general contractor’s attempt to negotiate a lower price than that bid from the subcontractor whose bid figure the general employed in calculating its own bid, frequently by threatening to subcontract the work to a third party.

When these practices are used, recovery can be denied under §90 – the contractor did not rely on the bid.

ALLEN V. VIRGINIA METAL (PG. 409): Subcontractor quoted price. General was awarded contract and subcontractor backed out. Subcontractor was bound to its bid under theory of promissory estoppel. Although bid was oral, UCC Statute of Fraud was not a defense because under N.C. law,

promissory estoppel overcomes the Statute of Frauds. HOFFMAN V. RED OWL (PG. 538): Defendant’s agent promised plaintiff that defendant would give

plaintiff a supermarket franchise for $18,000. Plaintiff purchased a small store to gain experience – it was profitable. Then defendant required plaintiff to sell the store just before the profitable summer months began. Plaintiff was then required to put up $1000 for an option on land to build the store, and was told he would get the franchise as soon as he sold his bakery – which he did. The amount plaintiff would have to contribute was raised to $24,000; then an additional $2000 was required. Some of plaintiff’s money was a loan from his father-in-law; defendant required that the loan be changed to a gift. Plaintiff brought an action for damages based on his reliance and defendant’s nonperformance. Court held for plaintiff – the doctrine of promissory estoppel applies. Even though the promise which is relied upon by plaintiff does not contain all of the necessary

essential elements to form a contract, promissory estoppel applies. P relied on promise to his detriment and fulfilled his end of bargain.

Court hints at opportunism here – that the price of the franchise kept increasing. Court’s decision creates a barrier to entry for the Hoffmans of the world – Red Owls will be less

likely to negotiate with them and Hoffmans will have more trouble in the expensive world of promissory estoppel litigation.

ACCEPTANCE KLINGENSMITH V. DISTRICT OF COLUMBIA (S 82): Defendant subcontracted with plaintiff for

plaintiff to perform plumbing and heating on public school construction project. Defendant informed plaintiff of the work it had yet to perform under the subcontract. Plaintiff claimed it had completed most of the work covered under the subcontract, and it further said it would halt work unless defendant paid 98% of payments due. Defendant informed plaintiff it was terminating the contract. Plaintiff billed defendant for $18K, and defendant disputed the amount. The parties outlined an agreement, and plaintiff sent defendant a letter with the outlined agreement. Defendant did not respond and did not pay; P alleged he made an offer which D accepted by its failure to respond. Court held that defendant’s silence was not acceptance. Silence can only constitute acceptance if

there was further work contemplated. Plaintiff did not rely to its detriment on defendant’s silence – there’s no basis in fact or law for

defendant to have expected that its silence was an agreement to settle all claims in the subcontract. Offeror ordinarily lacks the power to read an offeree’s silence result as acceptance.

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2 Exceptions that, given prior course of dealing or otherwise, transform silence into acceptance When offeree received benefits When offeror reasonably relied on other parties’ manifestations of acceptance to its

detriment Reasonable person standard to determine when silence can constitute acceptance; silence here was

ambiguous DAY V. CANTON (PG. 483): Plaintiff erected a wall – half of it was on a vacant lot owned by

defendant. Plaintiff claimed an express agreement for defendant to pay ½ of the expenses. The judge instructed the jury that if it found that plaintiff built the wall with the expectation that defendant would pay him, and defendant knew that plaintiff had this expectation and allowed plaintiff to perform, without objection, then the jury might infer a promise to pay. “Qui tacet consentire videtur, ubi tractatur de ejus commodo” – “he who is silent is considered as

assenting when his interest is at stake.” If a party voluntarily accepts and avails himself of valuable services rendered for his benefit, when

he has the option whether to accept or reject them, even if there is distinct proof they were rendered by his authority or request, a promise to pay for them may be inferred.

D knew P expected to be compensated for his services There could also be an argument for quasi-contract and quantum meruit here: plaintiff’s giving

half a wall could be unjust enrichment. COLE-MCINTYRE V. HOLLOWAY (PG. 471): Defendant’s traveling salesman solicited an order from

plaintiff on March 26. Plaintiff heard nothing until it called defendant on May 26 and asked for delivery of the goods. Defendant informed plaintiff that it had not accepted the contract. Salesman was in contact with P on a weekly basis but discussed neither acceptance or rejection. The contract form had provided that the contract was not binding until accepted by the seller at its home office. Plaintiff never received either confirmation of acceptance or notice of rejection of its offer. The price of goods had increased about 50% during the deal. Court held that the delay was unreasonable and constituted acceptance of the contract. Defendant had ample opportunity and a duty to decline the offer within a reasonable time given

the time-sensitive price of goods Acceptances can be communicated by formal acceptance or acts amounting to one

Delay in communicating action as to acceptance may amount to acceptance itself – when the subject of a contract, either in its nature or by virtue of conditions of the market, will be unmarketable by delay, delay in notifying the other party of his decision will amount to acceptance by the offeror.

Court sees opportunism here – legal obligations can emerge from inactivity. Clean hands are necessary to win

VI. Course of dealing, course of performance and usage of trade Course of performance is transformed into legally enforceable contract provision. Prior course of dealing can also supply terms to a contract. Course of dealing refers to what happened between the two parties in previous contracts over time. Course of performance refers to what parties have previously done under the contract at hand. Usage of trade refers to what other parties in the industry do. A party is obligated to do thing that are generally done in the trade, unless you explicitly write that you

are not specifically doing it that way. These doctrines do more than “fill in gaps”; they are interpretive guides. Acting in good faith means acting in accordance with reasonable commercial trade standards. The

duty of good faith is mandatory and non-waivable. UCC §1-201(3): “Agreement” means the bargain of the parties in fact as found in their language or by

implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act.

UCC §1-205. Course of Dealing and Usage of Trade: (1) A course of dealing is a sequence of previous conduct between the parties to a particular

transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

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(2) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court.

(3) A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement.

(4) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.

(5) An applicable usage of trade in the place where any part of performance is to occur shall be used in interpreting the agreement as to that part of the performance.

(6) Evidence of a relevant usage of trade offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise to the latter.

UCC §2-208. Course of Performance or Practical Construction:(1) Where the contract for sale involves repeated occasions for performance by either party with

knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.

(2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever possible as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade.

(3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.

HURST V. W.J. LAKE (PG. 598): Buyer and seller made contract for sale of horse meat scraps, minimum 50 percent protein for 50 dollars per ton. Under contract if any of scraps tested less than 50% protein, buyer was to receive 5 dollar per ton discount. About 170 tons contained less than 50%, but 140 of these contained 49 + percent protein. Seller claims that buyer is only entitled to discount on the meat that is less than 49.5%. Verdict for seller Words can have many meanings: in the absence of evidence to the contrary, when tradesman

employ trade terms they attach to them their trade significance. If they wanted to strip the words of their trade significance, they should do so explicitly. Trade custom: must be less than 49.5%

Looking to usage of trade and custom went on before the UCC. WHITE V. SUMMERS (PG. 601) “The code therefore adds to sales agreements much that is not made

express by the parties” NANAKULI PAVING V. SHELL (PG. 601): Plaintiff was an asphalt paver that bought all of its asphalt

requirements from defendant. The supply contracts between the parties specified that price would be defendant’s posted price at time of delivery. However, all material suppliers of asphalt paving industry followed a trade practice of price protection, whereby suppliers would charge pavers the price in effect when the pavers bid on the particular project involved. Most contracts were with government agencies that did not permit escalation changes. On two prior occasions, defendant in fact provided price protection for plaintiff by extending the old price for four and three months. However, defendant suddenly raised the price of asphalt from $44 to $76 after plaintiff had a contract for which it needed 7200 tons of asphalt. Court held for the plaintiff – prior use of price protection indicated that parties understood terms to

include price protection. UCC leads us to reconcile trade usage with contradictory express terms where prior course of

dealing shows clear intent to incorporate those usages into agreement or give express terms particular meanings according to usage. Usage should be allowed to modify express terms as long as it does not completely negate express terms.

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While it is a general rule that one instance does not constitute a course of performance, two may, especially when they were the only two occasions that necessitated such conduct.

Size of the parties is relevant Parties’ prior conduct can be best indicators of what they interpreted the contract to mean.

COLUMBIA NITROGEN V. ROYSTER (S 107): Parties contract for Columbia to buy phosphate from Royster. Traditionally, the contracting relationship had been the other way around. After contracting, the price of phosphate declined dramatically. Royster lowered its price for three months. Columbia still ordered less than was in the contract and Royster would not adjust the price to market level. Court held for Columbia – a finding of ambiguity is not necessary for the admission of extrinsic

evidence about the usage of trade and the parties’ course of dealing. The test of admissibility is whether the proffered evidence of course of dealing and trade usage

reasonably can be construed as consistent with the express terms of the agreement. In the past, they had been allowed not to buy the required amount so evidence of trade usage was

admitted. Trade usage issues usually mean no summary judgment.

Cases illustrate that if you let someone out of the contract once or twice you could end up being forced to do it again in the future.

SOUTHERN CONCRETE V. MABELTON (S 110): Buyer and seller entered into contract for a specified amount of concrete at a specified price for a specified period of time. During the period, buyer purchased far less than the specified amount. Seller brought action for lost profits by alleged breach. Court held that the contract was specific about quantity, price and time specifications – thus

custom and usage of trade evidence should not be allowed to be introduced. Distinguishing Royster:

There, one party was trying to take advantage of the other; not the case here. Here, no prior dealing

ZEMCO V. NAVISTAR (S 130A): D purchased all parts from P for twelve years under terms of the contract that Navistar is required to purchase “such quantities of the items listed herein as it might order or schedule.” . D then began buying parts from a third party (PMI) and phased out purchases from P. P claimed D breached the requirements contract. There was a clause that provided Zemco would give priority to Navistar if Zemco could not fill all of the orders placed with it. Navistar also alleged oral contract extensions violated statute of frauds which required renewals to be in writing. Court granted summary judgment for Navistar on both counts. Language alone did not constitute a requirements contract; must look to course of dealing and

usage of trade to make determination Reversed because contract served as requirements contract for a twelve-year period.

Parties’ intent was a genuine issue of triable fact; summary judgment was inappropriate. Because the original contract was in writing, the court held that the renewal, which involved

material terms, also needed to be in writing. BROOKLYN BAGEL BOYS V. EARTHGRAINS (S 130I): P sued for wrongful termination of contract,

alleging it was a requirements contract. P was to process and package for D for the “ordered quantity” of bagels. P agreed to purchase all of the raw materials and packaging supplies necessary to produce bagels at one of its plants. D opened up its own plant in a different city. D, having already curtailed its orders, gave 90-day notice of cancellation as required by the contract. There was also a clause that the contract “constitutes the entire agreement of the parties.” “Lack of quantity term does not necessarily render a contract ambiguous.” Quantity of contract was at the buyer’s option; D was not required to buy all, or any specified

quantity, of its requirements from P Distinguishing Zemco

Here, the contract was not ambiguous; there was no twelve-year history between parties; and no priority clause existed.

P did not have to order from D for 90 days but only had to give notice of cancellation. Not ordering during this 90-day period was not a breach of good faith.

VII. Remedies SPECIFIC PERFORMANCE

A symbol of the death of freedom of contract Can be reasons not to want forced performance (quality, etc.)

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Want such a provision when money damages are inadequateo Unique nature (portrait)o Long lead time to replace (e.g. need six months to find substitute, at which point your

company will be broke)o Other party is judgment proof

Court’s ability to quantify damages compared with madating specific performance is a considerationo E.g. Courts may grant specific performance in output contracts since they would otherwise be

more difficult to quantify. ( Try to make public interest argument when arguing in favor of specific performance (Laclede). Typically only granted when money damages are inadequate UCC §2-716. BUYER’S RIGHT TO SPECIFIC PERFORMANCE OR REPLEVIN:

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances.

(2) The decree for specific performance may include such terms and conditions as to payment of price, damages, or other relief as the court may deem just.

(3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

LONDON BUCKET V. STEWARD (PG. 312): Plaintiff and defendant contracted for the installation of a heating system for a large motel. Plaintiff alleged that defendant installed an incomplete, shoddy system and demanded specific performance. Defendant alleged there had been a mutual cancellation of the contract. Lower court awarded specific performance. Court held no specific performance here – can only get specific performance if money damages

are inadequate. Here, money damages would be adequate, even though they would be difficult to quantify.

But when you ask for damages, you open up all of the financial records of your company. General rule is that contracts for building construction will not be specifically enforced because

monetary damages are an adequate remedy and, in part, because of the incapacity of the court to superintend the performance.

MATTER OF GRAYSON ROBINSON (PG. 316): Iris contracted to erect a building and rent it to Grayson, but notified Grayson that because of mortgage difficulty, could not go further unless Grayson agreed to an increase in rent. It went to arbitration, as directed by the contract, which could impose specific performance. Arbitrator ordered Iris to “proceed forthwith with the improvements of the leased premises in accordance with the terms of the said lease, as amended. Iris appealed to a court of law and specific performance was awarded/affirmed. Arbitration is agreed to by and consent and it can enforce specific performance. Parties consented

to possibility of specific performance in the contract. VAN WAGNER ADVERTISING V. S & M (PG. 317): Parties contracted for lease of ad space on

billboard at exit of Midtown Tunnel. Leasor improperly terminated the contract. Leasee sued for specific performance because it found that there was no adequate remedy at law for damages. Specific performance denied, even though leasee argues that space is unique. Uniqueness does

not determine specific performance because all property is unique. We reserve specific performance for cases where the value is uncertain – not just unique. Uniqueness in the context of specific performance means value uniqueness – so that value cannot

be determined. Court might grant specific performance when value to P varies significantly from market value

LACLEDE V. AMOCO (PG. 319): Plaintiff and defendant agreed to an arrangement to provide central propane gas distribution systems to certain residential areas until natural gas mains were extended. Plaintiff, as distributor, was to provide and operate all distribution facilities from the outlet of defendant’s piping. Plaintiff promised to pay defendant four cents per gallon above a particular posted price. Plaintiff could terminate the agreement on 30 days notice at the end of any year or when natural gas mains were extended. Defendant had no right of termination. After a price dispute, defendant terminated the agreement, claiming it lacked mutuality. Plaintiff sought an injunction against the continuing breach.

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Court held for plaintiff – in order for one party to get specific performance, both parties do not have to be entitled to the remedy.

Granting SP requires additional monitoring costs of court Here, supervision would be easier given the enormous public policy involved.

Court’s difficulty with enforcement of specific performance is often overcome when public interest is involved.

Court applies UCC §2-716 – saying it is more inclined to grant performance (doesn’t completely rely on the policy argument).

Specific performance will not be decreed unless the terms of the contract are so expressed that the court can determine with reasonable certainty the duties of each party and the conditions under which performance is due.

WEATHERSBY V. GORE (PG. 321): Parties entered into contract for the sale of cotton that Gore produced for 30 cents per pound. Two months later, before cotton was picked, Gore cancelled contract on grounds that Weatherby did not provide the required payment bond. Plaintiff sued – by that time, cotton was trading for 80 cents per pound. Weathersby could have entered another contract or acquired the cotton on the open market. Weathersby, if entitled to any damages, must settle for the difference between the contract and

market price at the time that Gore cancelled. Some courts are more receptive to granting specific performance in output contracts since actual

damages would be more difficult to quantify. STOKES V. MOORE (PG. 316): Parties entered into an employment contract including a covenant not

to compete. Contract stated that if covenant was breached, “a restraining order or injunction may be issued and entered against me (employee) in any court of equity jurisdiction.” This sort of agreement to an injunction is not binding on the court, but it helps guide the court –

injunction granted. Example of negative injunction (e.g., you cannot work elsewhere)

DANZIG ON FULLERTON LUMBER CO. V. TORGORG (S 131): Plaintiff hires defendant to manage lumber yard. Contract says that if he quits, he cannot work in the same capacity within 15 miles of the yard for 10 years. He was an excellent employee, he quits, and within a year goes into the same business in the same town, and crushes his old employer. Defendant consulted an attorney but felt that the 10 year provision was unenforceable because it was unreasonable. Plaintiff sues for enforcement for the COVENANT NOT TO COMPETE. Court deviated from the normal BRIGHT LINE RULE – if some part of the covenant is

unreasonable, the whole thing is unenforceable, i.e., all or nothing. Instead, court embraces BLUE PENCIL RULE – change the unreasonable clauses and make them

reasonable. Blue pencil rule can hurt the smaller party/employee: employer knows that unreasonable parts of

contract can be rewritten and has less incentive to make the whole contract reasonable Do not use this defense unless your client has clean hands.

MONEY DAMAGES Goal is to compensate the breached-against party Efficient breach (Holmes) – is there such thing, how does the breaching party know what is in the best

interest of the non-breaching party?o The easier damages are to prove, the more likely the breach can be deemed efficient.o Efficient if the cost of performance exceeds the benefit to all parties.

Reliance damages: put P in position that he would be in had the contract never been made. Good when expectation damages are too difficult to quantify (see, e.g. Sullivan)

Expectation damages: put P in position he would have been in if contract had been performed Often easier to measure the value of performance than the extent of reliance

Objective: value that reasonable person would have attached Subjective: value that P attached Making P liable for performance damages forces him to internalize the costs of a breach

If liable only for reliance damages, he might not internalize all the costs he imposes on promisse when he breaches.

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Party might avoid seeking expectation damages if he does not want information about expected profits known.

Protecting the expectation interests never fully compensates breached-against party. Costs of delay in court

Restitution damages: usually too low; offers P only to recover the benefit conferred upon D. Context is key when determining appropriate damages (see Fox). HAWKINS V. MCGEE (PG. 208): Hawkins’s hand was severely burned in an accident. McGee, a

doctor, solicited an opportunity to operate, promising that he could make the hand “100% perfect.” The operation was unsuccessful and left plaintiff’s hand unsightly and less useful than before. Plaintiff brought an action for $10K damages based on breach of warranty. The judge instructed the jury that if it found for plaintiff, he was entitled to recover for the “pain and suffering he had endured” plus the injury he sustained “over and above what injury he had before.” Jury found for plaintiff and awarded $3K in damages. Judge set aside the verdict. Court held for defendant – proper measure of damages in the case is the difference between the

value to plaintiff of a perfect hand or a good hand, such as the jury found defendant promised, and the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract.

Expectation damages – an amount to put plaintiff in the position he would be in had the contract been performed.

The goal of expectation damages is compensation, not punishment. Reliance damages in this case would have given plaintiff the difference between his current hand

and his hand before the operation (would have experienced pain either way) SULLIVAN V. O’CONNOR (PG. 215 AND S 148): Sullivan, a professional entertainer, contracted with

O’Connor, a doctor, for a nose job. The parties contemplated two operations. The surgery actually required three operations and resulted in irreparable disfiguration of plaintiff’s nose. Plaintiff sued for breach of contract and negligence, but obtained a verdict only on the first count. Plaintiff recovered her out-of-pocket expenses, foreseeable damages flowing from defendant’s breach, and pain and suffering for the third operation. Plaintiff did not recover pain and suffering for the first two operations or the difference in value between the nose as promised and the nose as actually completed. Court upheld damage award – plaintiff recovers reliance damages – expenditures made by him

and for other detriment were proximate and foreseeable upon the defendant’s failure to carry out his promise.

Here, the court thought expectation damages might be excessive (like in Hawkins) – the court is worried about discouraging doctors – and restitution damages would be too low.

Court wants to protect her expectation interest but they do not want to create bad prospective actions – compromises on reliance damages.

LOUISE CAROLINE V. DIX (PG. 228): Plaintiff contracted to have nursing home built by defendant. Defendant defaulted before the construction was completed. Plaintiff sued for damages. Court-appointed arbitrator found that cost to complete was within the remaining balance of the contract price, thus plaintiff suffered no compensable loss. Decision of arbitrator was upheld – if the cost of completing the contract by using a substitute

contractor is within the contract price, less what had already been paid on the contract, no compensable damage has occurred.

The nursing home argued for the difference between the value of the building as left and the value they would have had in performance – they want the benefit of the bargain. Benefit of its bargain as would derive from obtaining a building worth much more than the

actual costs of construction are preserved if the building can be completed at a total cost which is still within the contract price, less any amount which has already been paid on the contract.

Court does not want to allow damages that would put the plaintiff in a better position than if the defendant had performed the contract.

GROVES V. WUNDER (S 168): Plaintiff owned land with sand and gravel – defendant leased land and agreed to leave the property at uniform grade. Defendant breached and did not restore – cost of restoration was $60K; if the defendant left the land as they were supposed to leave it, it would only be worth about $12K.

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Court held for plaintiff – the breach was willful and in bad faith. A willful transgressor must accept the penalty of transgression. The value of the land is of no concern. Plaintiff is entitled to fulfillment of the contract.

Plaintiff has a right to have the agreement performed as made, and the resulting damage, in case of failure, is the reasonable cost of performance. Whether such performance affects the value of the land is of no concern to the defendants.

Dissent thinks the proper measure of damages is the difference between the market value of the property in the condition it was when delivered to and received by plaintiff and what its market value would have been if defendant had fully complied with the terms – the extent of plaintiff’s recovery should be no greater than his actual loss.

Bernstein (and dissent) does not like this decision; seems to be an efficient breach and punitive. PEEVEYHOUSE V. GARLAND COAL (PG. 230): Plaintiffs leased their farm for five years to defendants

for coal mining purposes. One of the covenants in the lease provided that defendant would perform certain restorative work at the end of the lease period. Defendant did not perform the work and plaintiffs brought suit for $25K – the cost of the work. Jury gave verdict for $5K. The difference in the value of the land with and without the work was about $300. Both parties appealed. Court upheld the decision and decreased the damages – applied a diminution in value rule The owner is entitled to the money which will permit him to complete, unless the cost of

completion is grossly and unfairly disproportionate to the good to be attained – when that is true, the measure is the difference in the value of the land (“relative economic benefit”).

Considering the relevant economic benefit, a person cannot recover more than they would have gained by performance. Court wants to avoid economic waste; opposite of Groves

SCHENBERGER V. APACHE (PG. 239): Defendant drills for oil and gas on property of plaintiff. Plaintiff sues and the parties settle. Three years later plaintiff files new complaint alleging that defendant breached the settlement agreement by failing to achieve the reduced level of water contaminants the agreement specified. Plaintiff sought damages by cost of performance. Defendant argued that damages should be the diminution in value of property, relying on Peevyhouse. Court holds that the proper measure is the diminution in the value of the land caused by the

drilling operations – which in this case is $5K, while performance would cost over $1 million. The court noted that environmental protection statutes had been enacted since Peeveyhouse that

represented a change in public policy, but that the change was intended merely to balance competing interest; i.e., it required oil and gas operators to negotiate with the surface owner for payment of damages that might be caused by drilling. But the proper measure of damage did not change.

HP DROHER V. TOUSHIN (PG. 241): Defendant contracted with plaintiff to build a house for defendant for about $44K. The floor sagged noticeably, but the price of fixing it was $20K. The diminution in the value of the house caused by the sagging floor was far less than this amount. Court held that diminution in value rule should apply – noted that Groves was based, in part, on

the fact that the breach was willful and in bad faith. FOX V. WEBB (PG. 243)

Court distinguishes between dwellings constructed for the person to live therein and commercial structures – in the former, the person contracted for a particular structure, not just any structure of the same price/value.

Court upheld trial court decision awarding damages equal to the amount required to reconstruct the dwelling so as to make it conform with the specifications, rather than adopting the difference in loan value on the dwelling. Houses are uniquely linked to the aesthetic preferences of the buyer. Context is the key

AVOIDABILITY AND MITIGATION Victims must take all reasonable steps to minimize losses that they suffer. When invoking this duty, we must cite cases with factual similarity. Can contract around duty by inserting provision that describes substantially similar employment. Generally, no recovery is allowed for damaged reputation.

o Too speculative, hard to quantify, and usually outside contemplation of parties.

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ROCKINGHAM COUNTY V. LUTEN BRIDGE (PG. 260): P contracted to build a bridge for D. D changed its mind and gave notice of cancellation to P before actual construction began. P went ahead and built the bridge anyway, even though there was no road leading to it. P sued to recover the contract price and won. D appealed. Court reversed – D clearly breached the contract without a right to do so, but once P had received

notice of the breach, it had a duty not to increase its damages. P’s remedy is to treat the contract as broken when he receives notice and seek damages, including

expected profits as well as any losses suffered (reliance plus lost profits). Court is protecting the expectation interest – puts P in the same position it would be had the

contract been performed. Court must decide whether over- or under-compensatory damages pose a greater danger – over-

compensatory can provide an incentive to seize on small damage measure to recover large damage remedy; under-compensatory can allow promisor to breach at will without fear of a lawsuit.

MADSEN V. MURREY & SONS (PG. 263): Buyer ordered 100 customized pool tables from seller and breached. Seller claimed he could not sell because of special holes, etc… which would damage his reputation for quality. Experts claimed he could have sold. Court held that seller had a duty to mitigate its damages and failed to do so, because dismantling

the tables for salvage and firewood (rather than attempting to sell or market the tables at a full or discount price) was commercially unreasonable.

PARKER V. TWENTIETH CENTURY FOX (PG. 266): P contracted to play female lead in D’s movie Bloomer Girl, a musical production set in California. P was to receive a total of $750K. Before filming began, D decided not to produce Bloomer Girl and offered P the starring role in Big Country, Big Country, a western movie set in Australia. Certain provisions in the replacement offer differed (P would not have a right of approval of the director and screenplay). P refused to accept the role in the western and sued for money due under the contract as well as other damages resulting from D’s breach. The trial court granted P summary judgment for the agreed compensation, and D appealed. Court held for P – you only must take another job to mitigate if the jobs are substantially similar. The general rule is that the measure of recovery by a wrongfully discharged employee is the

amount of salary agreed upon for the period of service, less the amount that the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment.

HOWEVER, the employee need not accept employment of a different or inferior kind in order to mitigate damages – replacement must be “substantially similar.”

Dissent: issue of whether one is inferior to the other is a factual question and should not be decided on summary judgment – doesn’t think the difference is enough for excusing P from mitigating.

BANKONE V. TAYLOR (PG. 264): Bank wrongfully froze Taylor’s assets. As a result, Taylor was unable to continue doing business and sued the bank for damages. Bank claims that Taylor could have continued if she had used her own assets to pay. Court held for Taylor – although party required to mitigate, she is not required to “make

unreasonable outlays of money,” or to “sacrifice a substantial right of her own.” Injured party is required to incur “only slight expense and reasonable effort” in mitigating her

damages. PUNKAR V. KING (PG. 272)

A wrongfully discharged employee is not necessarily obligated to mitigate damages by accepting alternative employment at a distance from his home – majority of jurisdictions confine the search required to the immediate community or neighborhood.

MR. EDDIE, INC. V. GINSBURG (PG. 272): Plaintiff incurred expenses in finding another job after being wrongfully discharged from defendant’s service – court held that he could recover those expenses. A wrongfully discharged employee may recover expenses incurred in seeking alternative

employment, even though his mitigation attempts increased, rather than decreased, the damages. SOUTHERN KESWICK INC. V. WHETHERHOLT (PG. 272): In breach of contract case, jury was

instructed that employment of a different or inferior nature could not be used in reduction of damages – reversed.

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While the employee is not obliged to seek employment of a different or inferior nature, if he in fact obtains such employment within the contract period, his earnings should be used in mitigation (and reduction) of damages.

LOST VOLUME SELLER Doctrine is laid out by UCC §2-718; consistent with Code’s goal of protecting expectation interests NERI V. RETAIL MARINE (PG. 254): P contracted to purchase from D a new boat of a specified

model. P made a deposit of $4,250 in consideration of D’s agreement to arrange for immediate delivery. Six days after contract, P rescinded. In the meantime, D took delivery of the boat. D refused to refund P’s deposit, and P sued. D sold the boat to another customer 4 months later. P claims this shows there were no damages while D claims it shows he would have sold two boats. The proper measure of damages for a buyer’s breach from a seller who is a dealer with an

unlimited supply is the dealer’s profit on one sale, plus incidental costs/damages. Seller has to show that he could procure another boat and that it would be profitable.

TERADYNE V. TELEDYNE (PG. 258) “… in a case where after the buyer’s default a seller resells the goods, the proceeds of the resale

are not to be credited to the buyer if the seller is a lost volume seller – that is, one who had there been no breach by the buyer, could and would have had the benefit of both the original contract and the resale contract.

LIMITS ON EXPECTATION DAMAGES Issue of determining to which party the risk of breach should be allocated. Courts must fill in gaps as no contracts cover every possible contingency. FORESEEABILITY HADLEY V. BAXENDALE (PG. 275): P stopped operation of their mill when a crank shaft broke. P

contracted with D to have it shipped to the manufacturer for repairs. D’s employees were negligent in not completing delivery within a reasonable time and for 5 days P lost profits and wages paid. D had not been informed that the mill would not operate until the shaft was repaired. Where two parties have made a contract which one of them has broken, the damages which the

other party ought to receive in respect to such breach of contract should be such as may fairly and reasonably be considered 1) either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or 2) such as may reasonably be supposed to have been in contemplation of both parties at the time they made the contact, as the probable result of breach.

The courts want to force information sharing – P should reveal information to the person they are doing business with ex ante so that the socially proper amount of precaution can be taken and the proper cost can be charged.

You can only collect if the reasonable person could have contemplated the damages. If special circumstances are present, they must be communicated to get the damages.

2 Types of damages Reasonably foreeseaable at time of contract or arising naturally from course of business Those communicated

See Victoria Laundry VICTORIA LAUNDRY V. NEWMAN (PG. 280): P operated a laundry and dying facility. To expand

capacity, P ordered a large boiler from D. D knew that P was in laundry business and that it wanted to use boiler quickly. P refused delivery of boiler on agreed date because it was damaged. D agreed to fix the damages. P did not get the boiler until 20 weeks after the original date. P sued for lost profits of the expanded business during the 20 weeks. Court held that P could recover for reasonably expected lost business, but not for loss of the large

account that D claims it would have gotten if new boiler were installed. Court found that the threshold for the contract-breaker’s liability is whether he considered the loss

in question – he would as a reasonable man have concluded that the loss in question was liable to result – no way that D, an engineering company, did not foresee the lost profit to P resulting from its breach.

Foreseeability at time of contract is what matters. What was reasonably foreseeable depends on the knowledge then possessed by the parties, or at

least the party who later commits the breach. Reconstruction of hypothetical bargain: actual communication is not necessary

Might thus matter whether party was a neophyte

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KERR STEAMSHIP V. RADIO CORP. (S 174): P delivered to D a cryptic telegram that instructed one of P’s agents to divert certain cargo and load it into a different vessel. D lost the telegram and the cargo was not diverted - $6,675 lost by P. Judgment for that sum awarded to P – reversed and award reduced to $26.78 – the amount P paid for the telegraph. The company had no way to know that the transmission was of particular value – it is not enough

that they knew that this was a business transaction or that they could have ascertained the nature of the transaction.

For P to collect their loss in value, they would have had to explain the possible loss or told the nature of the transaction – sender can always protect himself by taking out insurance.

If we give each clerk the power to say something that would open up the company to a high level of liability, there will be higher costs of services.

Sender is the cheapest cost-avoider – has choice in companies to use and can always find insurance.

Hunt in cases for clues that doctrine of foreseeability is a doctrine about the allocation of risk. KOUFOS V. CAZARNIKOW (PG. 289): P chartered D’s vessel to carry sugar to a certain island for sale

on the market. D, making deviations on the route, caused the trip to take an extra 9 days. During those days, the market price of sugar dropped. P sued for the difference in profits from the missed market price and the price at which the sugar was actually sold. D was willing to pay 9 days interest on the value of the sugar, but the court permitted P to recover for the drop in the market price. D didn’t know all of P’s intentions, but he knew there was a market in sugar in arrival city, and

had he thought about it, he would have realized that the sugar would be sold in market price upon arrival.

D must have known that market prices fluctuate, but he had no reason to suppose that during those days, the fluctuation would be downward.

HECTOR MARTINEZ V. SOUTHERN PACIFIC (PG. 283): P shipped a product by rail on five separate rail cars. The final car arrived one month late. P sued D for the value of the product rental during the month it was late. The court held that the loss was reasonably foreseeable – dragline is a machine that has a value in

use. Capital goods such as machinery have a use value that may be equal to the rental value of the

equipment or may be an interest value. It might be quite foreseeable that deprivation of the machine’s use because of carriage delay will

cause a loss of rental value or interest value during the delay period – amount of damages that was reasonably foreseeable is an issue for the jury.

The rule under Hadley does not require P to show that the actual harm suffered was the most foreseeable or possible of harms – he need only demonstrate that his harm was not so remote as to make it unforeseeable to a reasonable man in the time of contracting.

CERTAINTY Courts place high burden of proof for establishing entitlement to a certain amount of money. Inextricably linked to foreseeablity. Lost profits for new businesses are uncertain and cannot be recovered. There is a trend away from

this rule (Fera) when new businesses can predict profits with certainty. KENFORD V. ERIE (PG. 287): D entered into a contract with P for construction and operation of a

domed stadium. The contract provided that construction begin within 12 months, and that negotiations would result in either a 40 year lease for operation by P, or a 20 year management contract. The contract provided remedies for default, but did not refer to lost profits. No terms were ever agreed to, construction never began, and the contract was breached. P brought action. To recover lost prospective profits: first it must be demonstrated with certainty that such

damages have been caused by the breach, and second, the alleged loss must be capable of proof with reasonable certainty. In addition, there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made (Hadley-like). In other words, must have 1) causality, 2) reasonable certainty and 3) foreseeablity under

Hadley Here, the court did not award expectation damages because there was uncertainty that there

was contemplation of lost profits at the time of contracting (Hadley). Moreover, although P

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provided comprehensive evidence about projected profits, there we too speculative to justify an award for lost profits, especially since there was no model of comparison.

FERA V. VILLAGE PLAZA (PG. 292): D, who had promised space to P for a “book and bottle” shop, lost lease and leased to another party. P sued for lost profits. New business can recover for lost profits if it has sufficient proof. Exception to the “New business rule,” which prohibits recovery of lost profits resulting from a

breach of contract for plaintiffs trying to establish new businesses. Compared to Dicker, a promissory estoppel case, lost profits are more easily granted in

breach of contract cases. ASHLAND V. JANIEN (PG. 290): D contracted with P to design an investment model to be used by

D. The contract provided for minimum sums to be under management by the investment model each year, and it provided if P left D’s employment, he was entitled to $50K or 15% of gross revenues per annum for all existing future accounts. D terminated P’s employment. Court held that P was entitled to damages for lost profits based on the projections set forth by

the minimum sums provision of the contract – the lost profits were accurately calculable It was not a new or unfamiliar business and the investment model was tested and there

was confidence in its ability to perform. The requirement that damages be reasonably certain does not require absolute certainty. It

requires only that damages be capable of being measured based upon known reliable factors without undue speculation.

WELCH V. U.S. BANCORP (PG. 292) “The court should intervene only when it can say that the evidence is clearly insufficient to

establish the claim of lost profits. This does not mean that the court should withdraw the question because the court might not be convinced by the evidence. … If reasonable men could be persuaded of the validity of the claim on the evidence presented, the jury must be allowed to make the decision.”

INDEPENDENT MECHANICAL V. GORDON (PG. 293) A degree of uncertainty is inherent in any projection of future profits – the essential issue is

whether the evidence on lost profits provides enough information under the circumstances to permit the fact finder to reach a reasonably certain determination of the amount of gains prevented.

CONTEMPORARY MISSION V. FAMOUS MUSIC (PG. 294): Record company breached contract that provided it would make “reasonable efforts” to promote music. At trial, P offered statistical analysis that showed that 76% of the songs that had reached #61 eventually climbed to #40, and many climbed even higher. They wanted to convert this evidence to monetary damages but the court excluded the evidence – reversed. The evidence should have been admitted – the record was real, the price was fixed, the market

was buying and the record’s success was increasing – thus, it was certain that P suffered some damage in the form of lost royalties.

RELIANCE DAMAGES Goal: Place party where it would have been if contract were never made (as in Promissory Estoppel). In general, reliance damages are granted for PE causes of action

o Expectation damages are usually granted in breach of contract cases.o Reliance damages can be awarded when expectation damages are insufficient, e.g.,

Lost profits are too difficult to calculate (Beefy Trail, Security Stove) Are under-compensatory; leave P much worse off than if no contract (Security

Stove) Ease of assessing damages plays a large role in decision whether to award them. SECURITY STOVE V. AMERICAN RAILWAYS EXPRESS (PG. 324): D agreed with P, who

manufactured stove and furnace equipment, to deliver a furnace to Atlantic City. D knew the furnace was to be used for exhibition purposes at a convention. D promised to get it there on time. An essential part of the furnace was not delivered, and P was unable to display its product. The trial court entered judgment for P for expenses incurred in preparation for the exhibit, and D appealed. In some circumstances, the injured party may recover expenses incurred in relying upon the

contract, although such expenses would have been incurred had the contract not been breached.

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Unless P is permitted to recover the expenses that it went to, which were a total loss to it by reason of its inability to exhibit, it will be deprived of any substantial compensation for its loss (i.e., expectation damages would have been zero).

Lost profits were too speculative; thus, court protects P’s reliance interest. The law allows plaintiff, in damages, the loss in the way of expenses that it sustained, and which it

would not have been put to if it had not been for its reliance upon the defendant to perform. Where P relies on the contract and incurs reasonable expenses, and all benefits of the contract are

lost through failure of D to perform, and where such expenses are within the contemplation of the parties at the time the contract was made, and where P’s loss is attributable to D, P’s expenses, damages may be recovered.

BEEFY TRIAL V. BEEFY KING (PG. 328) Where prospective profits are too speculative to be awarded as damages, the breaching party may

still be held liable to reimburse the non-breaching party for its expenses incurred in preparation and part performance of the contract.

ANGLIA V. REED (PG. 328): P spent pre-production money for location fees and hiring a director and other production personnel. P then hired D to play the lead. D later changed his mind and repudiated the contract. P had to abandon the film. The court awarded P all of its out-of-pocket expenses, including those incurred prior to the time D agreed to the contract. The court noted that D would not have been liable had he never entered the contract, but it

concluded that all of P’s expenditures were wasted because of D’s breach. D knew P’s expenditures would be wasted if he breached.

ALBERT & SONS V. ARMSTRONG RUBBER CO. (PG. 328): Seller agreed to sell to buyer four refiner machines. Seller breached by delay in delivery and buyer claimed reliance expenses on promise. It was a losing contract. The promisee may recover his outlay in preparation for performance, subject to the privilege of

the promisor to reduce it by as much as he can show that the promisee would have lost if the contract had been performed.

RESTITUTION DAMAGES Restitution is not measured by losses to the breached-against party – measured by what is gained by

the breaching party – goal is to prevent unjust enrichment (hence the connection to quantum meruit) Seek to put party in breach in position he would have been in had the K never had been made Benefits conferred must be returned to other party

Typically, restitution damages are less than expectation and reliance damages. Generally, courts disfavor awarding restitution damages – if you have another avenue of recovery, you

will probably be better of going after that measure, even if it is slightly lower than restitution award. Contract provisions themselves neither define nor limit the amount that can be recovered as restitution

damages. Contract price can be evidence of the value conferred, but it is perfectly fine for restitution damages to

exceed it. To get restitution damages, one must first establish that they are appropriate then must argue closely by

analogy how they should be calculated. There are times when lawyers will seek restitution damages even though expectation damages would

be higher because the former are/have Less risky Lower litigation costs Courts may be less inclined to reward uncertainty

OSTEEN V. JOHNSON (PG. 333): P contracted with D for D to promote P as a singer and composer of country-western music. Specifically, D was to advertise for one year, arrange and furnish locations for P to record songs, prepare two records from the songs recorded, press and mail one record to disc jockeys, and if the first record met with success, press and mail a second record. D substantially performed except he listed P only as a co-author of her own song and he failed to press and mail the second record after the first had been successful. The trial court awarded P nominal damages. Failure to perform a minor contractual duty will not make D liable in restitution but only in

damages. If D’s breach goes to the “essence” of the contract, however, P may recover in restitution.

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If P could recover restitution damages for non-essential parts of contract, he could sue for breach after the contract was almost substantially completed.

Perfect tender rule v. substantial performance D is entitled to keep the reasonable value of the services already tendered from the $2500.

P can collect amount of services paid less the completed parts of the contract. P cannot get restitution for parts of contract already completed or for services rendered.

Restitution depends on damages by the breaching party being substantial in order to prevent opportunism.

U.S. V. ALGERNON BLAIR (PG. 336): P (subcontractor) justifiably ceased work under a contract because D (general) breached. D then proceeded to complete the job with a new subcontractor. P brought action to recover for labor and equipment furnished. The district court held that P was entitled to recover the amount due to P, less what had already been paid – but that P would have lost more than this if performance were completed – so it denied recovery. P appealed and appellate court reversed. Issue before the court is whether a plaintiff may recover in restitution even if he would recover nothing in a suit on the contract. It is an accepted principle of contract law that the promisee upon breach has the option to forego

any suit on the contract and claim only the reasonable value of his performance. P recovered in quantum meruit, which allows P to recover his value of services regardless of

what he would have been able to recover for breach of contract suit. The contract price is not limited to the value of services.

Different than Britton The standard for determining value of services is the amount that such services would have been

purchased by a reasonable person in plaintiff’s position at the time of rendering services. OLIVER V. CAMPBELL (PG. 338): Oliver, an attorney, agreed to represent Campbell in a separate

action for $850. After the trial, the court indicated it would find for Campbell. Defendant fired Oliver and refused to pay him the remaining $350 owed. The value of the services provided was $5000. Court finds for Oliver and awards him the $350 remaining. If D wrongfully discharged him, P could sue in quantum meruit for the value of services

performed, even if they exceeded contract price. However, restitution damages are not available to one who has fully performed his part of a

contract if payment is all that remains to complete contract; thus, P only gets remainder of contracted price.

If you could get more by bringing the suit than if you fully perform, there would be an incentive to induce/precipitate breach and recover the cost of services provided.

BRITTON V. TURNER (PG. 339): P performed services for D under a one-year contract. D performed for nine months and then left without consent or good cause. D refused to pay P anything for his work and D sued in quantum meruit to recover the value of his services (9/12 of contracted price). D did not prove any damages caused by P’s early departure. An employee may recover the benefit to the employer under the contracted price, less damages the

employer suffers by reason of the early termination, with the contract providing a limit on the amount of recovery. May do so only by using quantum meruit.

To deny recovery would place the party committing the earlier breach in a better position than one who substantially completes the contract, thus defeating the policy of encouraging the fulfillment of contracts.

Courts are open in this area to incentive-based analysis and policy arguments. BERKE V. GRIFFEN (PG. 344)

Generally, quantum meruit recovery will not be awarded where the conduct has been willful. The breach is not ordinarily considered willful if there is an honest dispute as to contract

obligations. VINES V. ORCHARD HILLS (PG. 344): P, buyers of condo, breach after making a down payment

because P is transferred to another state by his job. D, condo owner, refuses to return down payment. A purchaser whose breach is not willful has a restitutionary claim to recover money that unjustly

enriches seller.

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To prove unjust enrichment, in the ordinary case, the purchaser, because he is the party in breach, must prove that the damages suffered by his seller are less than the moneys received from the purchaser.

Assume that judges start with the presumption that this is a penalty. NELSON V. HAZEL (PG. 346)

The general rule is that a defaulting party in a contract action cannot recover damages. An EXEPTION is made under building contracts because unjust enrichment would result if a

homeowner could retain improvements worth more than the damages caused by the contractor’s breach.

If the defective performance, even though less than substantial, has conferred a benefit on the homeowner in excess of his injury, he has a quasi-contractual duty to pay the contractor that excess.

LIQUIDATED DAMAGES Remedial provisions affect the value of the contract – what is the value of the promise to me if the

promise is not performed (what you’ll recover in damages less the cost to get them) … how likely is the contract to be performed/breached?

Court will enforce such clauses when they believe they are a genuine attempt to pre-estimate damageso They will scruitinze such cases with extra care and reject those clauses that are punitive or

penalty clauses.o Courts look to these provisions ex-post (in light of actual damages)o Somewhat odd that a court will look at actual damages to determine if liquidated damages

provisions should be upheld (i.e. why not just award actual damages if already calculated?) Party challenging the clause bears the burden of proof. UCC §2-718. LIQUIDATION OR LIMITATION OF DAMAGES; DEPOSITS:

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of an otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidate damages is void as a penalty.

(2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payment exceeds(a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in

accordance with subsection (1), or(b) in the absence of such terms, twenty percent of the value of the total performance for which

the buyer is obligated under the contract or $500, whichever is smaller.(3) The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller

establishes(a) a right to recover damages under the provisions of this Article other than subsection (1), and(b) the amount or value of any benefits received by the buyer directly or indirectly by reason of

the contract.(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale

shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer’s breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this Article on resale by an aggrieved seller.

WASSERMANS V. MIDDLETON (PG. 301): D owned commercial property that it leased to P for use as a store. The lease contained a cancellation clause that required D to pay P 25% of P’s average annual gross receipts, based on a 3-year average, if D canceled the lease. D canceled the lease 16 years later. P and its sublessee sued for damages under the lease. P’s sublessee had an average annual gross of over $1 million, but an average net profit of only around $1000. D sought declaration that the cancellation clause was invalid. A stipulated damages clause must constitute a reasonable forecast of the provable injury resulting

from breach; otherwise, the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures.

Stipulated damages can encourage efficient breach, but they can also allow private parties to punish, a responsibility of the courts.

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Liquidated damages is the sum a party to a contract agrees to pay if he breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damages that will probably ensue from the breach, is legally recoverable as agreed damages if the breach occurs.

Penalty is the sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach.

Uncertainty or difficulty in assessing damages is best viewed not as an independent test, but rather as an element of assessing the reasonableness of a liquidated damages clause. Thus, the greater the difficulty of estimating or proving damages, the more likely the stipulated damages will appear reasonable.

Actual damages reflect on the reasonableness of the parties’ prediction of damages – if damages provided for in the contract are grossly disproportionate to the actual harm sustained, the courts usually conclude that the parties’ original expectations were unreasonable. If actual damages are disproportionate to those contained in clause, the clause will be voided

regardless of the parties’ intentions. LAKE RIVER V. CARBORUNDUM (S 188): P and D entered contract for P to receive D’s product, bag

it, and ship it to D’s customers. D insisted that P install a new bagging system to handle the contract. P insisted on a minimum quantity guarantee, including: “if, at the end of the three year term, this minimum quantity shall not have been shipped, P shall invoice D at the then prevailing rates for the difference between the quantity bagged and the minimum guaranteed.” After the contract was signed, D’s demand fell, and when the contract expired, D had shipped only a bit more than half of the minimum guaranteed. P demanded payment and D refused on the ground that it was a penalty. Posner held that the damages formula was invalid, but P is still entitled to common law damages,

which in this case should be the unpaid contract price minus the costs P saved by not having to complete the contract.

These were sophisticated parties able to consider the costs and benefits; nevertheless, the law is that you cannot have liquidated damages unless they are a reasonable estimate of the likely damages from breach.

HUTCHINSON V. TOMPKINS (PG. 309): Contract for the sale of real property with a liquidated damages clause which provided that if buyer breached, seller could at their option elect to retain the $10K down payment. Buyer breached and escrow improperly returned the down payment. Seller brought suit to recover the down payment. Damages in real estate real estate are almost always readily ascertainable at the time of breach

because the market value of land is not hard to figure out. Liquidated damages should stand if the damages are not readily ascertainable at the time of

contracting – which was the case here; so it was not a penalty. The court noted that a liquidated damages clause is enforceable so long as damages were not

readily ascertainable at the time the contract was drawn, but equity will relieve against a forfeiture if the clause is unconscionable in light of the circumstances existing at the time of breach.

EQUITABLE LUMBER V. IPA (PG. 311) A liquidated damages provision will be valid if reasonable with respect to either (1) the harm

which the parties anticipate will result from the breach at the time of contracting, or (2) the actual damages suffered by the non-defaulting party at the time of the breach.

Prior law considered only the anticipated harm at the time of contracting, while the UCC expressly contemplates that a court may examine the actual harm sustained.

Having satisfied the test set forth in the first part of UCC §2-718(2), a liquidated damages provision may nonetheless be invalidated under the last sentence of the section if it is so unreasonably large that is serves as a penalty rather than a good faith attempt to pre-estimate damages.

DAMAGES FOR MENTAL DISTRESS VALENTINE V. GENERAL AM. CREDIT (PG. 295): P seeks recovery of mental distress damages

arising out of the alleged breach of an employment contract. P alleges that because the employment contract providing for job security has a personal element, and breach of such a contract can be expected to result in mental distress, she should be able to recover mental distress damages.

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The court denies damages – because an employment contract is not entered into primarily to secure the protection of personal interest and because pecuniary damages can be estimated with reasonable certainty, a person discharged in breach of an employment contract may not recover mental distress damages.

The general is to uniformly deny recovery for mental damages although they are foreseeable within the rule of Hadley – NARROW EXCEPTION – rather than look to the foreseeability of loss to determine the applicability of the exception, the courts have considered whether the contract has elements of personality and whether the damage suffered upon the breach of the agreement is capable of adequate compensation by reference to the terms of the contract.

Court does not rule that mental distress damages are never recoverable in breach of employment contracts; recoverable if Contracts have element of personality Only if something in contract gives us a sense how to measure those damages

JARVIS V. SWAN TOURS (PG. 299): P made a contract with D for a package holiday in Switzerland. The holiday was not as promised in the brochure, and in fact was a flop. P sued. The court held that not giving damages for mental distress is out of date. In a proper case damages for mental distress can be recovered in contract, just as damages for

shock can be recovered in tort – the right measure of damages is to compensate him for the loss of entertainment and enjoyment which he was promised and did not get (i.e. the value of trip)

JACKSON V. HORIZON (PG. 300): Similar facts to Jarvis, except that the vacation was for a family of four. The court held that Mr. Jackson, who made the contract to purchase the holiday package, was

entitled to recover the damages for the mental distress suffered by the whole family, not just himself.

DEITSCH V. MUSIC CO. (PG. 300): Contract for a band to play at P’s wedding, but the band never showed up. The court held that P was entitled to compensation for their distress and inconvenience, plus the

diminution in the value of their reception.VII. Doctrine of Substantial Performance IN GENERAL

Parties do not have to perform exactly what the contract said, but very close. If the parties were held precisely to strict performance there would be room for opportunism as parties could shirk.

Perfect Tender Rule: parties must do everything exactly as specified in the contract. This doctrine gives an enormous power to the courts. JACOBS & YOUNG V. KENT (PG. 893): CARDOZO: P built D a house using pipe (Cohose) functionally

similar to but different from that required by the contract. P asked for the final payment nine months after D began occupying the house, but D’s architect refused to give the required certificate because the wrong pipe had been installed. The value of the house was not reduced by the substitution, and it would be hugely expensive to change the pipe. P sued for payment. The correct measure of damages in the difference in value not the cost of replacement. Where the omission is trivial and not willful, it will be excused and damages for the minor breach

of condition will be allowed rather than holding that there is a breach of condition forfeiting the entire contract.

Installation of type of pipe was a promise (as opposed to condition precedent); thus, suit for breach of contract is available.

Common chattels are treated differently than skyscrapers. In construction contracts, substantial performance is sufficient; perfect tender is not necessary

BRUNER V. HINES (PG. 896) “The doctrine of substantial performance recognizes countervailing interest of private individuals

and society; and, to some extent, it sacrifices the preciseness of the individual’s contractual expectations to society’s need for facilitating economic exchange. … The wisdom of its application adds legal efficacy to promises by enforcing the essential purposes of contracts and by eliminating trivial excuses for nonperformance.”

This is a bit of an overstatement – it helps some groups but it hurts others. If you cannot afford to sue, then the contract gets you very little value.

JARDINE ESTATES V. DONNA BROOK (PG. 896)

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Substantial performance is compliance in good faith with all important particulars of the contract. A builder’s default should not be willful, nor the defects so serious as to deprive the property of its

value for the intended use, nor so pervade the whole work that a deduction in damages will not be fair compensation.

VINCENSI V. CERRO (PG. 897) Even a conscious and intentional departure from the contract specifications will not necessarily

defeat recovery, but may be considered as one of the several facts involved in deciding whether there has been full performance.

The pertinent inquiry is not simply whether the breach was “willful,” but whether the behavior of the party in default “comports with standards of good faith and fair dealing.”

The “willfulness” of the breach should be weighed with other factors, such as the extent to which the owner will be deprived of a reasonably expected benefit and the extent to which the builder may suffer forfeiture.

KREYER V. DRISCOL (PG. 897): P, a contractor, orally agreed to construct a home for D. P encountered difficulties in completing the house, and never completely finished it, leaving undone all of the linoleum and half of the plumbing, heating, electrical and tile work. P sued on the contract, alleging substantial performance. To recover on an uncompleted construction contract on a claim of having substantially, but not

fully, performed it, the contractor must make a good faith effort to perform and substantially perform his agreement.

P did not perform substantially enough in this case to win. P could try to recover in quantum meruit the fair value of the benefit conferred to D.

If you lose on substantial performance, you can try quantum meruit. O.W. GRUN V. COPE (PG. 900): Contractor installs roof that has streaks of the wrong color.

When it’s a question of taste or fancy, the person is entitled to get exactly what they contracted for.

“In the matter of homes and their decoration, as much as, if not more than in any other fields, mere taste or preference, almost approaching whimsy, may be controlling with the homeowner, so that variations which might, under other circumstances, be considered trifling, may be inconsistent with that ‘substantial performance’ on which liability to pay must be predicated.”

CONTRACTS FOR THE SALE OF GOODS This is a very unclear area of law with a lot of risk for clients. There are risks of getting locked into long-term relationships. Courts are supposed to look at (1) the extent to which the injured party will be deprived of the benefits

that they expected, (2) the extent of adequate compensation, (3) likelihood of cure, (4) good faith. Once you label something a “condition” in a contract, every other non-labelled condition will likely be

treated as a promise. UCC §2-508. CURE BY SELLER OF IMPROPER TENDER OR DELIVERY; REPLACEMENT:

(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.

(2) Where the buyer rejects the non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may, if he seasonably notifies the buyer, have a further reasonable time to substitute a conforming tender.

UCC §2-601. BUYER’S RIGHTS ON IMPROPER DELIVERY: Subject to the provisions of this Article on breach in installments contracts (§2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (§2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest.

UCC §2-608. REVOCATION OF ACCEPTANCE IN WHOLE OR IN PART: (1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity

substantially impairs it value to him if he has accepted it (a) on the reasonable assumption that its non-conformity would be cured and it has not been

seasonably cured; or

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(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.

(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

UCC §2-612. “INSTALLMENT CONTRACT;” BREACH: (1) An “installment contract” is one which requires or authorizes the delivery of goods in separate lots

to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its equivalent.

(2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure, the buyer must accept the installment.

(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract, there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without reasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

CONTINENTAL FOREST V. WHITE LUMBER (PG. 905): P contracted to sell 20 carloads of plywood to D. D concluded that the first carload shipped did not meet specifications and told P that it intended to cancel the contract. P had already sent two more carloads. The contract was subject to a trade code that permits a variance of 5%; a greater variance permits rejection of nonconforming wood, but not cancellation. Inspection of the first two carloads showed that the first had a 9% variance, but the second was below 5%. P sued to recover damages for the attempted cancellation, and won, the trial court finding that nonconformity fell within UCC §2-612(2) and thus could be cured. D appealed, claiming that the court’s legal conclusion that there was a material breach of contract placed the case within UCC §2-612(3), which would permit cancellation. The court held that the defect could have been cured and D could not terminate the entire contract. Assuming that the nonconformity exists, (1) the nonconformity must impair the value of that

installment (2) such impairment must be substantial, and (3) the defect that gives rise to the nonconformity must be incurable for D to cancel entire contract

TW OIL V. CONSOLIDATED (PG. 908): P bought a cargo of fuel oil having no greater than 1% sulfur content. While the cargo was at sea, P received notice from the foreign refinery that the oil actually contained only .52% sulfur. P sold the oil to D. The sales contract described the sulfur content as .5% pursuant to industry custom. D disclosed that it could burn oil having a sulfur content of up to 1%. After the oil shipment arrived, testing showed it contained .92% sulfur. D rejected the shipment, and the parties could not agree to a price reduction because the market price had fallen and D refused to pay more than the latest market price. A day after D’s refusal, P offered to cure the defect with a substitute delivery, but D refused this offer as well. P resold the oil elsewhere at a loss of over $1 million. P sued for breach of contract and obtained a judgment. D appealed. UCC §2-508 gives a seller a right to cure a defective tender under certain circumstances. This is a

limitation on the perfect tender rule, intended to promote good faith dealings in recognition of reasonable commercial standards. The right to cure safeguards a seller against surprise resulting from the buyer’s sudden technicality.

A seller should have recourse to relief afforded by UCC §2-508(2) as long as it can establish that it had reasonable grounds, tested objectively, for its belief that the goods would be accepted.

For UCC §2-508 to apply: (1) a buyer must have rejected the nonconforming tender; (2) the seller must have had reasonable grounds to believe this tender would be acceptable (with or without money allowance); and (3) the seller must have “seasonably” notified the buyer of the intention to substitute a conforming tender within a reasonable time.

All of these requirements were met in this case, and P should have been allowed to tender a cure. D claims that the statute should be limited to situations where a seller knowingly makes a

nonconforming tender which it has reason to believe the buyer will accept. However, those courts that have considered the question have been concerned with the reasonableness of the seller’s

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belief that the buyer would accept the goods, not the seller’s knowledge or lack thereof of the defect. This is the best approach because it conforms the law to reasonable expectations and thwarts the party that seeks to escape form a bad bargain. P’s belief was reasonable under the circumstances, and D improperly rejected P’s reasonable and timely offer to cure.

ZABERSKI V. SMITH (PG. 913): P sold D a new car that had problems. P took it back and replaced the transmission. D would not accept the car and P sued. A “cure” which endeavors by substitution to tender a chattel not within the agreement or

contemplation of the parties is invalid. The purchase of anew car is a major investment – once person’s faith is shaken, the vehicle loses it

value and integrity.VIII. Conditions of Performance CONDITIONS GENERALLY

This is a very case-oriented doctrine, and the reasoning is very formalistic in the sense that you attach a specific label

o Realist in the sense that you must decide into which box to put the condition. Condition precedent: where some event must occur before the party becomes liable. Condition subsequent: where liability would be relieved by some event. A duty is destroyed when a condition subsequent occurs, while a duty arises when a condition

precedent is satisfied. Using a condition rather than a promise can at least attempt to avoid the doctrine of substantial

performance. If condition is precedent, natural to put on plaintiff the burden of pleading and proving its performance. If condition is subsequent, burden of pleading and proof should fall on defendant. BROWN MARX V. EMIGRANT SAVINGS BANK (PG. 915): P paid a total of $33K for a $1.1 million

“ceiling loan” commitment from D to finance the purchase and renovation of an office building. The commitment required P to provide a signed lease for at least $714,447 in annual rentals and an appraisal showing a value of the building of at least $2.4 million. If these requirements were not met, D would provide a “floor loan” of $750K. Using this commitment, P obtained $1.1 million in interim financing, to be repaid from the proceeds of the permanent loan from D. D’s inspector noted that some of the space shown by P to be rented was in fact vacant and other space was rented by businesses affiliated with P. D notified P that it considered the appraisal insufficient and that the rents fell $85K short of the required minimum. D sent another inspector to whom P refused access. P stated that all requirements were met, and that D should at least have provided the “floor loan.” P’s other bank refused to extend their interim loans, and the building was sold to pay them off. P sued for breach of contract on the theory of substantial performance. Court held that substantial compliance with an express condition precedent does not satisfy the

condition. Loan commitments are essentially option contracts – P’s performance being acceptance of an offer

to lend money. The requirements of option contracts governing the manner of acceptance are strictly applied.

This case illustrates the usefulness of express conditions when the parties desire to make sure performance meets a specific standard (no chance that court can find substantial performance).

Sophistication of parties was a factor here; it also mattered that P did not have “clean hands.” Issue at hand was a winery to the parties.

MERRIT HILL V. WINDY HEIGHTS (PG. 920): P entered into a written agreement with D to purchase a majority stock interest in D’s vineyard, and tendered a $15K deposit. The contract provided that D was to keep the deposit as liquidated damages unless certain “conditions precedent” had not been fulfilled by D, including obtaining a title insurance policy and a confirmation that certain mortgages on the vineyard were in effect and that the sale would not constitute a default. P refused to close upon hearing that neither the policy nor the confirmation had been issued. D did not return the deposit and P brought suit for its return and for consequential damages. The trial court refused P’s motions for summary judgment, and the appellate division granted P summary judgment on the return of the deposit and dismissed the consequential damages claim. The court held deposit must be returned since the condition was not met. The court held that failure to fulfill a condition does not entitle the other party to consequential

damages; the court essentially voided the contract

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While a contracting party’s failure to fulfill a condition excuses performance by the other party whose performance is so conditioned, it is not, without an independent promise to perform the condition, a breach of contract subjecting the non-fulfilling party to liability for damages.

HOWARD V. FEDERAL CROP. INSURANCE CO. (PG. 925): D held a crop insurance policy for P. P’s tobacco crop was damaged by heavy rain. P harvested and sold the depleted crop and filed timely notice and proof of loss with D, but prior to inspection by D’s adjuster, P either plowed or disked under the tobacco fields in question to prepare the same for sowing a cover crop of rye to preserve the soil. D denied the claim because of a clause in the policy stating that the tobacco stalks shall not be destroyed until D makes an inspection. The court found that the clause was a promise and not a condition precedent – no forfeiture of the

policy. If you are going to call one thing in a contract a condition precedent, you have to call everything

else you want to be one clearly a condition precedent. Generally, the law opposes forfeitures and insurance contracts are construed against the insurer. Provisions are not construed as conditions precedent unless the language requires such a

construction. If it is doubtful whether the words create a promise or a condition, they will be interpreted to be a promise.

Whether a provision is a promise or a condition does not depend entirely on the use of the word condition.

HARMON CABLE V. SCOPE (PG. 928): Under a purchase agreement for the sale of a cable-television system, seller agrees to indemnify the purchaser if a minimum number of persons were not subscribers to the system at the time of closing. Agreement provided for notice within a certain timeframe. The agreement provided that purchaser shall assert claim to seller within 30 days of discovery and no later than 18 months after closing. There was a subscriber shortfall, but the purchaser failed to comply with the notice provision and seller refused to indemnify – calling it a condition. Whether contractual language is deemed conditional or promissory generally depends upon the

intention of the parties. Where the intent of the parties is not clear, the disputed language is generally deemed to be

promissory, rather than conditional. Absence of any language indicative of a condition precludes a conclusion that the parties clearly

intended the notice requirements to constitute a condition to the creation of the contract. Thus they are promises, the breach of which gives rise to an action for damages.

Terms such as “if,” “provided that,” “when,” “after,” “as soon as,” “subject to,” “on the condition that,” or some other similar phrase are evidence that performance of a contractual provision is a condition.

CONDITIONS OF SATISFACTION Is satisfaction determined by an objective (Embry) or subjective (Peerless) standard? If you use general words like performance must be satisfactory, this is taken to mean a reasonable man;

but if you say personally satisfactory, court might allow use of subjective standard. Consider factors: (1) the language used; (2) the degree to which it is possible to apply an objective

standard to the performance in question; (3) the degree to which the defendant will be enriched at the plaintiff’s expense if the contract is interpreted to require the personal satisfaction of the defendant; and (4) the degree of forfeiture that will be imposed on the plaintiff if the defendant escapes liability to pay for his performance.

MORIN BUILDING V. BAYSTONE (PG. 935, POSNER): D was hired by GM to build an addition to a Chevrolet plant. The walls were to be built of aluminum with mill finish. D hired P to supply and erect the walls. P’s contract provided that all work would be done subject to the final approval of GM’s agent, whose decision in matters relating to artistic effect would be final. The decision of acceptability would rest strictly with GM. P erected the walls, but in bright sunlight they did not have a uniform appearance. GM rejected it and D hired a replacement subcontractor. P sued for the balance of the contract price. The court held that a subjective standard does not apply to a satisfaction clause in a commercial

building contract for a factory wall that does not require a painted finish or other aesthetic qualities.

A reasonable person standard is employed when the contract involves commercial quality, operative fitness, or mechanical utility that other knowledgeable people can judge.

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The standard of good faith is employed when the contract involves personal aesthetics or fancy. The presumption is that big companies do not have subjective tastes, so if they want them, they

must be explicit in contract. There is more discretion to accept or reject the service/good as you move from pig-iron to a

portrait. FORMAN V. BENSON (PG. 939): Buyer made an offer to purchase real estate with a purchase price to

be paid over ten years. Seller expressed concern over buyer’s creditworthiness. Seller added provision: “subject to seller’s approving buyer’s credit report….” Seller accepted the offer but thereafter refused to convey on the ground that he was not satisfied with the buyer’s credit. Seller attempted to renegotiate the purchase price before canceling contract. The court held that the subjective rather than the objective standard should be applied. The personal standard … does not allow the defendant to exercise unbridled discretion in rejecting

plaintiff’s credit, but rather is subject to the requirement of good faith. The court found that the seller acted in bad faith, evidenced by his attempt, prior to rejection, to

renegotiate the purchase price. FURSMIDT V. HOTEL ABBEY (PG. 939): P was to provide valet and laundry services to guests of D,

and P paid D $325 per month for the franchise on a 3-year contract. The agreement had a provision that P’s services “shall meet with approval of the hotel, who shall be the sole judge of the sufficiency and propriety of the services.” D informed P that it was discontinuing P’s services. P sued for breach of contract. D counterclaimed for damages that it said it sustained by reason of P’s failure to render adequate and proper services. The court found that the agreement was one involving fancy, taste, sensibility and/or judgment. It

finds that the subjective standard is okay to terminate the contract, but the objective standard is used when evaluating the appropriateness of damages.

Provision was deemed to be a satisfaction clause not a condition precedent; thus, damages were awarded.

CONDITIONS OF PAYMENT Courts are strongly influenced by their view of the hypothetical bargain. THOMAS DYER V. BISHOP (PG. 941): P, a subcontractor, contracted to do plumbing work for D, the

general. P also performed extras worth as much as the contract work. The contract provided that payments from D to P were not due “until five days after owner shall have paid contractor therefor.” P had received only about half of the amount due when the owner declared bankruptcy, and D refused to pay P the balance. P successfully sued for the balance. The court held that a provision that makes the time of payment depend on the occurrence of some

event does not make the obligation to pay contingent on the occurrence of that event. The parties could not have intended to impose the risk of the owner’s solvency on the

subcontractor – the provision is a reasonable one designed to postpone payment for a reasonable period of time after the work was completed, during which the general would be given the opportunity of getting the funds from the owner. If risk were to be allocated to party other than the GC (the norm), the contract should have

specifically stated so. Tendency of the court is to hold that unless the contract shows clearly that such an action is an

express condition, the provision with reference to such act is inserted in order to fix the time of performance, but not to make the doing of such act or the happening of such event a condition precedent.

PEACOCK CONSTRUCTION V. MODERN (PG. 946): GC refused to pay sub because GC had not been paid by owner. The intent in most cases is that payment by the owner to the general is not a condition precedent to

the general’s duty to pay the sub. This is because subs will not ordinarily assume the risk of the owner’s failure to pay.

Parties can shift the risk of payment failure, but it must be unambiguously expressed, and the burden of clear expression is on the GC.

NOTICE AND EXCUSE A condition will be legally excused if the party whose duty was conditional wrongfully prevents or

hinders the occurrence of the condition.

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If the nonoccurrence of a condition would cause disproportionate forfeiture, the nonoccurrence may be excused unless the condition was a material part of the agreed exchange.

Impracticability may excuse nonoccurrence if the condition is not material and forfeiture would result by not excusing the nonoccurrence.

A party’s promise to perform a duty in spite of the nonoccurrence of a condition is generally binding. INMAN V. HALL (PG. 947): P worked for D under a written employment contract. The contract had a

provision that the employee must give written notice to the company for any claim in connection with employment within 30 days of the occurrence of the claim, and that the 30 day notice requirement is a condition precedent. P was terminated after 4 months. He commenced the action ten days after he was terminated, and served the complaint on D; however, he did not provide the specified written notice. The court held that it was not contrary to public policy for a contractual provision to make written

notice of a claim a condition precedent to recovery. In determining whether certain contractual provisions should be enforced, the court must look

realistically at the relative bargaining positions of the parties in the framework of contemporary business practices and commercial life.

Competent parties are free to contract and are bound by their agreements, subject to constitutional or statutory constraints. Courts may also decline to enforce contracts that are fundamentally unfair or unreasonable.

P claims he was excused from performance of the condition precedent of giving written notice because D breached the agreement. Assuming D did breach, this breach would excuse P from further performance under the contract, but not from performing the condition precedent. P’s failure to give notice was not caused by D’s breach.

Neither party took advantage of other party; no unconscionability was present. AETNA V. MURPHY (PG. 951): D terminated his lease. In dismantling his office, he damaged the

premises. The insurer of the premises, P, served D with notice of a suit on 11/21/83. D moved to implead his own insurer, Chubb, on 5/14/86. Chubb in turn moved for summary judgment on the ground that D failed to provide notice as required in the insurance policy. D responded that Chubb could not deny coverage because of late notice without showing that it was prejudiced by the delay. Court held that an insured’s failure to notify his insurer about a lawsuit until two years after being

served, despite a requirement in the insurance policy for immediate notice of a lawsuit, voided coverage.

In determining whether relief from disproportionate forfeiture is appropriate, loss of coverage must be weighed against insurer’s legitimate interest – factual inquiry – if it can be shown that the insurer suffered no material prejudice from the delay, the nonoccurrence of the condition of timely notice may be excused because it is not “a material part of the agreed exchange.”

D had the burden of proof on this issue and failed to offer evidence in his affidavit opposing summary judgment, so P should prevail on its motion.

BURNE V. FRANKLIN (PG. 957): P held a life insurance policy with D. Face amount was for $15K, with a double indemnity provision for an additional $15K if the insured died by accidental means. However, the policy stated that the accidental benefits were only payable if the insured died within 90 days of the accident. P was hit by a car and suffered extensive brain damage. He was kept alive in a vegetative state for 4.5 years. D paid face amount when he died, but refused to pay accidental death benefits on the ground that his death did not occur 90 days after the accident. The court held that the 90 day provision was unenforceable on the grounds that it was against

public policy. The provision created a paradox of paying less to people who endured prolonged illness, suffered

longer, and probably incurred greater expense. The provision is also based on outdated modes of medicine. Nowadays, doctors can keep people

alive for much longer periods of time.IX. Excuses for Non-Performance

INTRODUCTION Issues come up regarding changed circumstances, such as where parties believe something is true and

it is not. Risk allocation – one key function of contracts is to allocate risk. Sometimes in contracts risk

allocation is explicit, sometimes it is implicit. Courts are amenable to arguments on who is the best risk spreader.

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From a social point of view, it is desirable that information which reveals a change in circumstances affecting the relative value of commodities reach the market as quickly as possible – the time between the change itself and its comprehension should be minimized.

Allocative efficiency is promoted by getting information of changed circumstances to the market as quickly as possible – getting resources into the hands of those who value them the most

Deliberately acquired information describes information whose acquisition entails costs which would not have been incurred but for the likelihood, however great, that the information in question would actually be produced.

Casually acquired information means information that would have been incurred in any case – that is, whether or not the information was forthcoming.

If information has been deliberately acquired and its possessor is denied the benefits of having and using it, he will have an incentive to reduce his production of such information in the future.

By being denied the same benefit, one who has causally acquired information will not be discouraged from doing what – for independent reasons – he would have done in any case.

One effective way of insuring that an individual will benefit from the possession of information is to assign him a property right in the information.

One way in which the legal system can establish property rights in information is by permitting an informed party to enter, and enforce, contracts which his information suggests are profitable, without disclosing the information to the other party.

A duty to disclose is tantamount to a requirement that the benefit of the information be publicly shared and is thus antithetical to the notion of a property right that, whatever else it may entail, always requires the legal protection of private appropriation.

Allocative efficiency is best served by permitting one who possesses deliberately acquired information to enter and enforce favorable bargains without disclosing what he knows.

Court look at two factorso Best risk spreader/insurer

Which party has the best ability to protect against the probability or magnitude of the loss

o Cheapest cost avoider Party that can avoid the contingency with the least expenditure of resources.

Courts reconstruct the hypothetical bargain: how would the parties have allocated the risk if they expected the contingency to occur?

Excuse discharges liability from a contract that did exist MISUNDERSTANDING

RAFFLES V. WICKELHAUS (“PEERLESS”) (PG. 354): Defendant agreed to buy cotton to be shipped by plaintiff to England from India aboard the ship “Peerless.” Defendant refused to accept delivery, indicating that he meant the “Peerless” leaving Bombay in October, not a different ship “Peerless” leaving in December. Plaintiff sued for breach. Court held for defendant – he bought the cotton that came on the October ship, which was the ship

he believed he had contracted for. There was no meeting of the minds on the issue of which boat – there must be assent for there to

be a contract. Peerless doctrine: there must be a meeting of the minds as to material terms – material terms are

wineries. Court says that if there is a contract for goods in two warehouses and they are exactly the same,

the contract is satisfied by goods from either warehouse, even if the contract asked that they be from a specific one.

The goods in this case were not a warehouse but a winery – it matters when they arrive, as the cotton market fluctuates – to impose the later goods on the defendant would be to impose an entirely different contract.

OSWALD V. ALLEN (PG. 355): Oswald and Allen contracted for the sale of Swiss coins. Oswald thought he was getting all of Allen’s Swiss coins, while Allen thought she was selling only her “Swiss Coin Collection” (as opposed to the Swiss coins in her “Rarity Collection”). The court held that no contract was formed.

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Even though the material assent of the parties is not requisite for the formation of a contract, that fact clearly places this case within the small group of exceptional cases in which there is no “sensible basis for choosing between conflicting understandings.” Most courts would rule that assent is necessary for a valid contract; this is an exception. The rule in Peerless is applicable here.

Both Peerless and Oswald: neither party was to blame FALCK V. WILLIAMS (PG. 357): P and D used a code for business communication. P received a

telegraphic offer with an ambiguity. It turned out his interpretation of the ambiguity was not that which D put on it. P sued for breach of contract, contending that his construction was the true one. The court held for D, but noted that D would equally have failed had he, as P, sought to maintain

his construction. COLOFAX V. LOCAL NO. 458-3M (PG. 356)

If neither party can be assigned the greater blame for the misunderstanding, there is no nonarbitrary basis for deciding which party’s understanding to enforce, so the parties are allowed to abandon the contract without liability. These are not the cases in which one party’s understanding is more reasonable than the other’s.

MUTUAL MISTAKE If there is conscious ignorance, mutual mistake does not apply. Look at if either party has better expertise. If there is a sophisticated and a non-sophisticated party,

this might make a difference. The doctrine of mutual mistake is very fact specific – courts are traditionally reluctant to dig so deep,

and yet according to this doctrine, they have to – so courts are reluctant to rescind contracts. Courts are reluctant to nullify contracts based on these grounds; try other defenses first. Finding of mutual mistake does not mean there was no contract, as opposed to lack of mutual assent.

o Nullification v. no contract to begin with SHERWOOD V. WALKER (PG. 670): D sold P a cow (Rose 2d of Aberlone) that both believed was

barren. Before delivery, D discovered that the cow was going to have a calf; D refused delivery since the value of the cow was far greater than the contract price. P sued for breach. The court held for D – a contract may be rescinded where both parties make a mistake of material

fact that goes to the very substance of the agreement. The contract was based on a mutual mistake concerning the subject matter of the contract. A party who has given an apparent consent to a contract for sale may refuse to execute it, or he

may avoid it after it has been completed, if the assent was founded, or the contract made, upon a mistake of material facts – such as the subject matter of the sale, the price, or some collateral fact materially inducing the agreement; and this can be done when the mistake is mutual.

Doctrine of conscious ignorance did not apply here. Both parties bargained and contracted for a sterile cow.

The fertile cow is more like a winery than a warehouse. GRIFFITH V. BRYMER (PG. 676): P contracted to rent D’s room to see the coronation procession.

Earlier that day it was decided to operate on the king, which made the procession impossible; but neither P nor D knew about this at the time of contracting. P sued for the return of his money. The mutual mistake went to the very purpose of the contract – performance was impossible. “This was a missupposition of the state of facts which went to the whole root of the matter.”

BACKUS V. MACAULRY (S 200): P, cattle breeders, bought a newborn bull calf from D for $5K that later turned out to be sterile (only worth about $30). Sterility could not be determined until the calf reached 12 months of age. P sued to recover the contract price. The court held that P could not recover the purchase price. Where parties know there is doubt in regard to a certain matter and contract on that assumption,

the risk of the existence of the doubtful act becomes an element of the bargain. There’s no way to know if a 16 day old bull is sterile or not – if this were grounds for rescission,

you could never sell a young bull. Parties were dealing in conscious ignorance; risk of sterility was likely factored into contract price. If you were developing a factual record, you have to ask whether, at that age, you can tell whether

the bull is sterile or not. WOOD V. BOYNTON (PG. 676): Wood found a small stone and sold it to Boynton for $1, both parties

thinking it was not a diamond. Boynton, a jeweler, later ascertained that the stone was a rough cut

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diamond worth about $750. After learning this, Wood tendered $1 plus 10 cents interest to Boynton and demanded the return of the stone. Boynton refused and Wood brought action for rescission. The court held for Boynton – neither party knew the value of the stone and each party took the

risk. There was no pretense as to the identity of the thing sold – if Boynton had paid $500 and it turned

out to be a topaz, he could not have rescinded. Both parties had equal information at the time of the transactions, and both parties had resources

to verify the value of the stone. Access to information is an important consideration Distinguishing Sherwood: Sherwood was not in possession of the cow and could not have really

procured the information without risking transaction breakdown. Wood had the rock and could have done an investigation.

FIRESTONE V. UNION LEAGUE (PG. 678): P bought a painting believed to be a major work of Bierstadt for $500K in 1981. Thereafter, art historians expressed doubt that it was actually a Bierstadt, and it came to be held that it was a Key – which was much less valuable. In 1988, P brought suit for rescission and damages asserting that as a Bierstadt, the painting was worth more than $500K, but as a Key, it was worth only $50K. The court held that P’s claim, if any, accrued at the time of sale, and was thus barred by the four-

year statute of limitations period. The court went on to say that P probably did not have a claim anyway – “if both parties correctly

believed at that time that the painting was generally believed to be a Bierstadt, and in fact is was then generally regarded as a Bierstadt, it seems unlikely that P could show that there was a mutual mistake of fact.”

The market for paintings fluctuates – this could have happened to either party. BEACHCOMBER V. BOSKETT (PG. 688): P, a retailer dealer in coins, bought a coin from D, a part-

time dealer in coins for $500. The coin was believed to be a 1916 dime minted in Denver, which was very rare. It was later discovered that the “D” was counterfeit. P brought action for rescission on the grounds of mutual mistake. The court held for P and allowed the rescission. It is well established that a party to a contract can assume the risk of being mistaken as to the

value of the thing sold. However, for the stated rule to apply, the parties must be conscious that the pertinent fact may not be true and make their agreement at the risk of that possibility. Here, both parties were certain that the coin was authentic. Decision still seems inconsistent with conscious ignorance doctrine.

This is an interesting decision because both parties are coin dealers. If trying to rescind contract, cite Sherwood; if trying to uphold it, cite Wood Understanding what types of investigations are customary (here, seller assumes risk) was

important to the trial court. HINSON V. JEFFERSON (S 200): P sued D to recover the purchase price of a piece of land conveyed

by D to P and to cancel the deed. There were certain conditions in the deed. D knew P wanted to build a residence, and that it would require using a septic tank or an on-site sewage system. It turned out the land was on top of a swamp and the county authorities denied P a permit for the installation of a septic system. Neither P nor D knew that the land would not support a septic system at the time of the sale. The deed contained no covenant or warranty that the land was suitable for the construction of a residence. The court held that D violated the implied warranty of habitability, and thus P, by timely notice of

the defect, was entitled to full restitution of the purchase price. P did not win on mutual mistake: courts are reluctant to grant in RE transactions

Where there is a clear bona fide mistake regarding material facts, without culpable negligence on the part of the person complaining, the contract may be avoided and equity will decree a rescission – the true test is whether the contract would have been entered into had there been no mistake.

If lose on mutual mistake can try breach of implied warranty Doesn’t apply to defect that the buyer could detect through reasonable efforts Seller was in best position to detect risk than buyer-widow.

SMITH V. ZIMAILIST (S 203): D was an internationally prominent violinist who visited the home of P, an 86 year old collector of rare violins. D asked P to sell “this Stradivarious” and “this Guarnerius.”

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P said he normally didn’t sell, but that he would sell them together for $8000. The parties signed memoranda evidencing the sale (which named the violins). It turned out the violins where cheap knock-offs, worth about $300. D refused to pay the $6000 balance, and P sued to recover the balance. The court affirmed a judgment for D. Both parties were honestly mistaken as to the identity of the

subject matter. Furthermore, this was a sale by description in which there was a warranty that the goods conformed to the description.

What about the status of the parties in this case? What type of incentives is the court setting up here?

COSTELLO V. SYKES (S 203): Seller sold ten shares of stock in bank to buyer for $1360. If the bank’s books had been correct, each share would have been worth $136. Unknown to both parties, some employees had falsified the books, and the stock was only worth $60 a share. The buyer’s action to recover the purchase price was dismissed. There was no mistake as to the

identity or existence of the stock, but only as to its attributes, quality or value. Purchasing stocks always involves some amount of risk that should be assumed by parties.

UNILATERAL MISTAKE Importance of clean hands – very equitable doctrine. Relief will not be granted if the non-mistaken party was prejudiced by the mistake. ELISNORE UNION V. KASTEROFF (PG. 691): D, a contractor, submitted a bid for construction work

on a school. P opened the bid and, finding it substantially less than the others, asked D if his figures were correct. D said yes, although D did not have his work sheets to refer to. After a vote by P to accept D’s bid, D discovered that he had not included $6500 for plumbing work. D promptly notified P and asked to withdraw his bid. P refused and asked D to sign the contract. D refused. P sued. The court held that D was entitled to rescission because P learned of D’s mistake of computation

before accepting the bid. P knew or had reason to know before it accepted D’s bid that there had been a unilateral mistake

by D. D was not guilty of negligence in preparing the bid; D informed P promptly. It would be unconscionable to enforce the contract in these circumstances.

This is a very equitable based doctrine – importance of clean hands/smelling like a rose – don’t use the doctrine if you don’t have clean hands.

CHENSHAW V. ST. PAUL (S 204): Similar mistake in contracting bid except that bid had been accepted prior to attempted recission. The “equitable exception” to the general rule that a unilateral mistake does not avoid a contract is

not applicable where the rescission would prejudice the non-mistake party. It would not be unconscionable to enforce the bid, which was not disproportionate to other bids or

to the cost of the project. MISREPRESENTATION

Scope of duty to disclose depends on: Whether other party had reasonable opportunity to discover things on their own Whether there was something in the surrounding circumstances that would have tipped off party

OBDE V. SCHEMEYER (PG. 699): D bought an apartment house and later discovered termites. A pest control expert did some repairs but indicated that periodic inspections would be necessary since the work might not be complete. D then sold to P without disclosure of the termite condition. P discovered the termites and sued for damages on a theory of fraudulent misrepresentation. A seller must disclose to a buyer latent defects that are dangerous or material and which the buyer

could not discover by a normal inspection. Nondisclosure is a fraud. SWINTON V. WHITINSVILLE SAVINGS BANK (PG. 703): Facts similar to Odbe.

The court rejects the notion of any duty to disclose patent defects. “If this defendant is liable on the declaration, every seller is liable who fails to disclose any non-

apparent defect known to him in the subject sale which materially reduces its value and which the buyer fails to discover. Similarly, it would seem that every buyer would be liable who fails to disclose any non-apparent virtue known to him in the subject of the purchase which materially enhances and of which the seller is ignorant.”

This position of the courts has been gradually eroded. But the seller is the cheapest cost-avoider. We expect the seller to know everything that the buyer

might know and more with relatively little effort.

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IMPOSSIBILITY, FRUSTRATION, IMPRACTICABILITY Where does the allocation of risk of an unexpected contingency fall? Who is the superior risk-bearer?

Who is better at preventing the loss? Who is the cheapest cost avoider and superior insurer? Who is in a better position to predict the magnitude of the loss?

Who is the better insurer – think of a grain dealer who can diversity risk by having many providers and can estimate the probability of default and provide for it.

UCC §2-615. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS: Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b)

and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

TAYLOR V. CALDWELL (PG. 717): P entered a contract with D under which P would be allowed to use a hall for four days in order to give concerts. The contract provided that the existence of the hall in a state fit for a concert was essential. Before the concerts were to be given, the hall was destroyed by fire. Neither party was responsible for the fire. P sued for breach of contract, claiming as damages the money spent in preparing for the concert. Court held that both parties were excused from the contract – the parties contracted on the basis of

the continued existence of the theater at the time when the concerts were to be given. Because the theater ceased to exist without fault of either party, both parties are excused.

For positive contract, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible.

For contracts with express/implied conditions, the parties understood that a specified thing must continue to exist for the contract to be performed, and the contract must be construed as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible form the perishing of the thing without default of the contractor. Concert hall was a winery.

Do we really think the parties would have entered a hypothetical bargain that said that if something unforeseen happens, we’ll settle for no damages and/or no recovery.

We need to worry that the delivering party will take adequate precaution against all the contingencies that could make performance impossible.

OCEAN TRAMP V. V/O (PG. 724) Case shows the problems with the hypothetical bargain method of reasoning. Originally thought that the doctrine of frustration was based on an implied term – if the parties had

considered that, they would have said, “It’s all over between us.” But here, the parties would not have said that; they would have differed about what was to happen;

each would have sought to insert reservations or qualifications of a different kind. MINERAL PARK LAND V. HOWARD (PG. 724): P owned land in a ravine and D was building a

concrete bridge across the ravine. Parties entered a contract under which P granted D the right to haul gravel and earth from its land, and D agreed to take from that land all of the gravel necessary for the work on the bridge. D took only about half of all of the gravel necessary for the job, but D took all of the gravel that was above ground. Taking gravel from under the water level would have been extremely expensive. The court held that D was excused – the parties assumed that the land had the requisite quantity

available for use – and in determining “available,” must view the conditions in a practical and reasonable way.

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A thing is impossible in a legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.

Could argue for the opposite result by saying that defendant was the cheapest cost avoider – he was the expert in sand and gravel and should have known what was going on.

Case was decided before the UCC was enacted. U.S. V. WEGEMATIC (PG. 725): D won a contract to deliver a computer system to P (Federal

Reserve) for $231,800. Delivery was to be made on 6/30/57, with liquidated damages of $100 per day for delay, and by the terms of the contract P could procure alternative serves and charge any excess cost to D. Development of D’s system took longer than expected, and in 10/57, D requested cancellation of the contract. P purchased a system form IBM and sued D for $235,806, which it won. D appealed. The court affirmed the holding for P – basic engineering difficulties that prevent timely delivery

do not constitute commercial impracticability excusing performance. There is no basis to think that when a system is promoted by its manufacturer as a revolutionary

breakthrough, the risk of the revolution’s occurrence falls on the purchaser – the reasonable supposition is that it has already occurred or, at least, that a manufacturer is assuring the purchaser that it will be found to have occurred when the machine is assembled.

If the case had come out differently, there would be big barriers to new entrants who want to use liquidated damages clauses to enter a market.

Courts are reluctant to step in if it looks like the parties at least considered this outcome – even if they didn’t expressly contract for it – here there was the liquidated damages clause.

DILLS V. TOWN OF ENFIELD (PG. 727): Dills entered contract with town to purchase property and Dills made a down payment. The conveyance was conditioned on Dills submitting and having approved a construction plan in accordance with the contract, and the submission of evidence of financial capacity. The contract had a provision that if Dills could not get financing, he could withdraw and get down payment. Another provision said that if Dills did not submit a construction plan the town could keep the down payment as liquidated damages. Dills never submitted a construction plan because he could not get financial approval and so his plans did not need to be submitted. The court held for the town – cannot find that Dills not getting financial approval was a

nonoccurrence of which was a basic assumption on which the contract was made. The contract had express provisions to deal with the exact situation.

This is a very formalistic approach; furthermore, both parties were sophisticated. TRANSATLANTIC FINANCING V. UNITED STATES (PG. 728): D chartered a vessel operated by P to

carry a cargo of wheat form the United States to Iran. The charter did not specify a route. Six days after the vessel left port, the Egyptian government closed the Suez Canal, through which P’s vessel intended to sail, and the vessel made the extended voyage around the Cape of Good Hope to reach its destination. P sought to recover additional compensation for its increased expenses, but its action was dismissed. The court holds that when performance is rendered more difficult or expensive by unforeseen

events, the injured party cannot proceed with performance, recover the contract price, and then, in addition, recover its extra costs.

If P could prove commercial impracticability, the result would be to nullify the contract. Thus, P’s theory of relief should have been quantum meruit for the entire trip, not only the extra expense.

When a legal impossibility is alleged, the court is asked to construct a condition of performance based on the changed circumstances, which involved three steps:(1) A contingency must have occurred. The closing of the Suez is clearly an unexpected barrier

to the expected method of performance.(2) The risk of the unexpected occurrence must not have been allocated either by agreement or by

custom. There is no indication of any express allocation of risk, although P, by failing to include any terms regarding the occurrence of such a contingency, may have assumed abnormal risks.

(3) The occurrence of the contingency must have rendered performance commercially impracticable. There is no indication that the extended voyage was physically impractical. The variation between expected and actual cost of performance cannot be construed as involving commercial impracticability.

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AMER. TRADING V. SHELL (PG. 732): Similar facts as Transatlantic. Ship traveled twice as far and American billed Shell about $131K as extra compensation. Shell refused to pay and American brought suit. American tried to distinguish Transatlantic by noting that the time and length of altered passage for exceeded that in Transatlantic. Court held for Shell – the court picked up on the fact that the master of the ship was radioed about

a possible problem in the Suez, and yet he continued across the Mediterranean anyway. The extra cost could have been reasonably avoided by American if it wished to avoid the risk.

KRELL V. HENRY (PG. 758): D contracted to hire P’s apartment for two days. Both knew that the purpose was for D to see the king’s coronation parade, which would have been visible from the window; this purpose was not stated in the contract. The parade was postponed when the king became sick. P sued for the balance due on the contract. D counterclaimed for the money he put on the deposit. The court held that frustration of purpose excuses performance of a contract and held for D. Where the purpose of the contract is frustrated by an unforeseeable supervening event, and the

purpose was within the contemplation of both parties when the contract was made, then performance is excused.

The purpose may be implied from extrinsic sources – in this case it was clear that the purpose was to view the coronation parade.

The attainment of the purpose of the contract becomes an implied condition precedent to performance.

In order for the person who has contracted to pay the price to be excused there must be:(1) No default on their part.(2) Either the physical extinction or the not coming into existence of the subject matter of the

contract.(3) The performance of the contract must have been thereby rendered impossible.

P could also argue under mistake, implied condition precedent, or impossibility. BARBAROSSA V. ITEN (PG. 756): D agreed to supply P with a truck from its supplier for P to use in its

business. D ordered truck from GM; GM warned D of potential cancellations and subsequently cancelled the order. P purchased similar truck from third party and sued D for damages. The court holds for P – does not believe that GM’s cancellation of the order was a contingency the

nonoccurrence of which was a basic assumption on which the contract was made. Generally, seller used standard form contract that included escape clause for just this type of

situation – for some reason standard form was not used in this case. D could have conditioned its offer on its ability to obtain a truck from GM. It failed to do so and

therefore must be held to its bargained obligation. SELLAND PONTIAC-GMC V. KING (PG. 757): P lined up customer to buy four buses. To fill order, P

entered contract with D – under contract, P would supply chassis and D would furnish bodies that would be built on top of chassis. Contract indicated D would get bodies from specific third party. Third party went out of business and D could not get the bodies. P sued for damages. The court held for D – supply of the bodies was a basic assumption on which the contract was

made. Court relies on the fact that the third party supplier was specifically named in the contract, and the

supplier ceased to manufacture, versus simply canceling the orders of some of its dealers (distinguishing this case from Barbarossa).

The doctrine is rarely applied when all that is at issue is a change in the cost/price. That is why it is unlikely to be a winner in a commercial context

X. The Parole Evidence Rule Parole evidence rule does not apply to any agreements made subsequent to the agreement in question. Parole evidence rule does not apply to aid in the interpretation of a contractual provision if the court

finds that it is not confusing on its face. Judge has to decide whether the writing is an integrated agreement – if it is integrated, extrinsic

evidence cannot be introduced. Parole evidence is more likely to be admitted into standard form contracts.

o In negotiated contracts, the expression of one thing means the exclusion of another. No one universal doctrine; must look to your jurisdiction to see how courts generally act. UCC §2-202. Final Written Expression: Parol or Extrinsic Evidence:

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Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended to by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented(a) by course of dealing or usage of trade or by course of performance; and(b) by evidence of consistent additional terms unless the court finds the writing to have been intended

also as a complete and exclusive statement of the terms of the agreement. MITCHILL V. LATH (PG. 548): P bought some property under written contract from D. Later, D and

P made an oral agreement that D would remove the icehouse from a third-party’s land that P did not like. D never removed the icehouse and P sued for specific performance. Court held for D – an oral agreement must be separate to be admitted. Three conditions must be met for agreement to be admitted:

(1) The agreement must be a collateral one – must be capable of being expressed in a separate agreement, but has to be somewhat related to the contract.

(2) The agreement must not contradict express or implied provisions of the written contract.(3) The agreement must be one that the parties would not ordinarily be expected to embody in the

writing. The court hold that the agreement here is not collateral; the subject is closely related to the subject

of the written contract; the terms would likely have been covered in the original contract if the parties had wanted them to be; and the oral agreement can be said to contradict the terms of the written contract.

This is the Hamer court of parol evidence – very formalistic. HATLEY V. STAFFORD (PG. 557)

Court can consider the “surrounding circumstances” in addition to the face of the document to determine whether or not an oral term is one that “naturally” would have been included in the writing.

In considering the surrounding circumstances, courts should look at:(1) Parties with business experience are more likely to reduce entire agreement to writing than

those without business experience – especially when represented by counsel. (This seems contradicted by D&G Stout.)

(2) The relative bargaining strength of the parties.(3) The apparent completeness and detail of the writing itself.

The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the entire agreement.

MASTERSON V. SINE (PG. 558): Husband and wife conveyed ranch to husband’s sister and husband, with an option for repurchase through standard form contract. Conveyor/husband was adjudged bankrupt. Trustee in bankruptcy and wife brought declaratory relief action to establish their right to enforce the option. Ds argued that the parties intended to keep the land in the family and that the option was only to be exercised by them. The court held that evidence of the parties’ intention to keep the land in the family should be

admitted. D’s evidence that the parties agreed that option was not assignable in order to keep property in the family does not contradict anything in the written contract.

When only part of the agreement is integrated, parole evidence cannot be used to add to or vary the terms – but parole evidence may be used to prove elements of the agreement not reduced to writing.

Parole evidence should only be excluded when the jury is likely to be misled by its admission. The fact that there is a written memorandum does not necessarily preclude parole evidence

rebutting a term that the law would otherwise presume. The fact that it was standard form makes court more inclined to admit parole evidence.

HUNT FOODS V. DOLINER (PG. 562): P negotiated with D for the purchase of a company primarily owned by D. Although a price was agreed to, other essential terms were not, and the negotiations recessed for several weeks. P, fearing that D would use P’s offer to solicit a higher bid elsewhere, took an “unconditional” option from D. D expressed concern that the option was “unconditional,” and he obtained an understanding that it would be used only if an outside offer was solicited. Negotiations

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resumed and the parties were unable to reach full agreement. P exercised the option and D refused delivery of the stock. P moved for summary judgment for specific performance and won. D appealed. The court abided by the UCC and reversed – the additional oral term does not contradict or negate

a term of the writing; it cannot be precluded as a matter of law or as factually impossible. The evidence should only be inadmissible where the writing contradicts the existence of the

claimed additional term. It is not sufficient that the existence of the condition is implausible – it must be impossible.

Comment (1)(b) of UCC §2-202 requires a lawyer to ask client about what he understands the other side to understand the words to be – really requires lawyer to understand the client’s business.

ALASKAN NORTHER V. ALYESKA (PG. 564) Court supports the view of “inconsistency” as “the absence of reasonable harmony in terms of the

language and respective obligations of the parties.” Court prefers this view over the narrow view in Hunt Foods.

ARB V. E-SYSTEMS (PG. 566) Court believed contract was intended to be complete and exclusive statement of terms of the

agreement – mostly because there was an integration clause. But even with an integration clause, there still needs to be a Peerless-like meeting of the minds. In some states you need specific assent in these clauses; in some states you need a separate

signature. SEIBEL V. LAYNE (PG. 566)

Court holds that merger clause most be conspicuous – “it would be unconscionable to permit an inconspicuous merger clause to exclude evidence of an express oral warranty.”

UCC limits unconscionable results. STEUART V. MCCHESNEY (PG. 575): P executed an agreement granting to D a Right of First Refusal

on a parcel of improved farmland. The agreement provided that during P’s lifetime, should P find a BFP for value, D could exercise their right to purchase “at a value equivalent to the market value … according to the assessment rolls” as maintained by the county. The property was appraised at $50,000. P received BFP offers of $35,000 and $30,000 for the land. Upon receiving notice of the offers, D sought to exercise is purchase right by tendering $7,820 – exactly twice the assessed value of the property on the tax rolls (tax rolls always record 50% of market value). P refused tender and commenced an action to cancel the Right of First Refusal, or, in the alternative, to have the agreement construed as requiring that the exercise price be that of a BFP or fair market value. D sought specific performance. The court held for D – the language of the Right of First Refusal was express and clear and did not

require reference to extrinsic evidence for interpretation – the contract does not link the exercise price to the amount of the BFP offer that acts as a trigger for the exercise of the option.

When words of a written contract are clear and unambiguous, the parties’ intent is to be discovered only from the express language of the contract – in such a case, there is no basis for inquiring into the possibility of silent intent.

The plain language rule has been criticized on the ground that there never can be some one real or absolute meaning of the words alone, because words take their meaning from the surrounding circumstances – few words have such a fixed and single meaning that they are incapable of denoting more than one thought; however, courts may not make a new contract for the parties, and should limit their inquiry to the words chosen by the parties, which constitute the final expression of their intent.

The plain meaning approach reinforces the reliability of contracts by minimizing the fear that a court will later construe the meaning to mean something other than what the parties clearly expressed – it also prevents a party who becomes dissatisfied with the contract from fabricating a new meaning.

PACIFIC GAS V. GW THOMAS DRAYAGE (PG. 584): D contracted to replace a metal cover on the steam turbine owned by P. D agreed to work at its own risk and to indemnify P against all loss or liability resulting from injury to property arising from D’s performance. While D was working, the cover fell and damaged the turbine. P sued to recover the amount it spent on repairs. D sought to prove that the parties intended the indemnity clause to cover only injury to property of third parties, not P’s property. D offered admissions by P’s agents and the course of dealing between P and D, but the

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trial court found that the contract had a plain meaning so that parole evidence was inadmissible. The court awarded P damages and D appealed. The court held that the contract was reasonably susceptible to D’s proposed interpretation, and that

D’s evidence should have been admitted as proof that the clause had that meaning. “The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is

not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” Irony: justifies this saying it will further the notion of freedom of contract; the parties’ intent

will become more clear. A court must ascertain and give effect to the intention of the parties by determining what the

parties meant by the words they used. Accordingly, the exclusion of relevant extrinsic evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.

The true meaning of a word can only be found by considering all of the surrounding circumstances that reveal the sense in which the writer used the words.

GARDEN STATE V. S.S. KRESGE (PG. 587) Court takes a “Traynor-like” (Pacific Gas) view of parole evidence; shows Traynor is not alone. Interpretation and construction must necessarily precede protection against forbidden

contradiction and modification. In the process of interpretation and construction, all relevant evidence pointing to meaning is

admissible – and this is not a violation of the parole evidence rule. BERG V. HUDESMAN (PG. 589)

Plain meaning rule states that if the writing or the term in question appears to be plain and unambiguous on its face, its meaning must be determined within the four corners of the instrument without resort to extrinsic evidence of any nature.

Context rule states that the court considers the surrounding circumstances leading to the execution of the agreement, including the subject matter of the contract as well as the subsequent conduct of the parties, not for the purpose of contradicting what is in the agreement, but for the purpose of determining the parties’ intent.

Court here holds that extrinsic evidence is admissible as to the entire circumstances under which the contract was made as an aid in ascertaining the parties’ intent.

AGFA-GEVAERT, A.B. V. A.B. DICK (PG. 594) There are two ways to look at judge and jury – procedural way and substantive way. Black-letter procedural rule is that the meaning of a written contract is a question of law and is

therefore to be decided by the judge rather than by the jury. There is a trend is toward a jury unless the question can be answered only in one way.

Black-letter substantive rule (a.k.a. “four corners rule) is that if a written contract is clear on its face – that is, clear to someone who can read English but does not know the background of the contract – evidence may not be introduced to vary that apparent meaning. Trend is that extrinsic evidence may be introduced if contract is ambiguous on its face or to

show that it is ambiguous.

When reviewing: ex ante incentive effects and freedom it gives judge to do justice ex-post

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